It Takes A Citi

Washington-based policy tinkerers  seem increasingly drawn to the idea that greater reliance on market information can forestall future problems – e.g., providing input into an early warning system that can be acted upon by a “macroprudential system regulator”.  And while leading critics of the administration’s proposed approach to rating agencies make some good points, they also seem to think that the market tells us when big trouble is brewing.

The history of Citigroup’s credit default swap (CDS) spread is not so encouraging.

It’s true that in some instances during the past two years, CDS spreads have indicated pressure points, e.g., within types of lenders or across countries.  And if you can tell me how Citi survives going forward with a CDS spread around 450 basis points, I would be grateful.

The people who price CDS  obviously have every interest in assessing risk in a hard headed and accurate manner.  But Greenspan’s Lament applies to CDS traders just as much as to incentives within mismanaged banks – where in the Citi CDS spread chart do you see the build up of risk through the end of 2006?  If anything, the market for default probability was saying that Citi – and by implication the financial system with all its growing subprime vulnerabilities – was becoming less risky.

You can hope that, in the future, the market will not be so generally exuberant, but 400 years of modern financial history begs to differ.

The WSJ gets this right: regulatory capture is not only pervasive, it is by design.  But what’s the implication?

All regulators must ultimately fail and, when that happens, markets may well also misprice risk.  The question is: When this Twin Failure occurs next time, how much will be on the line? 

You cannot design a financial system that is immune to crash – this would be like declaring earthquakes illegal.  But in the aftermath of unexpectedly high damage from a serious earthquake, it makes sense to completely overhaul your building code and retrofit vulnerable buildings.  In fact, if you largely ignored what the earthquake revealed in terms of structural weakness, wouldn’t that be negligence?

By Simon Johnson

57 responses to “It Takes A Citi

  1. I think it’s a great idea to seize and shut down any bank whose CDS gets bid up high enough. What could possibly go wrong?

    We should replace our government with a Board of Directors elected by shareholders and auction off the shares. It would be just like the system we have now, but more transparent.

  2. The rating agencies have actually anticipated this criticism. They now market such products as “market implied ratings,” which are based on CDS, median credit spreads, etc.

  3. Federal Deposit Insurance Act: I can’t make out the reasons for discontinuance, but to obtain a certificate of insurance from the FDIC, 18 U.S.C. 1816 says the factors to be considered are:

    (1) The financial history and condition of the depository institution.
    (2) The adequacy of the depository institution’s capital structure.
    (3) The future earnings prospects of the depository institution.
    (4) The general character and fitness of the management of the depository institution.
    (5) The risk presented by such depository institution to the Deposit Insurance Fund.
    (6) The convenience and needs of the community to be served by such depository institution.
    (7) Whether the depository institution’s corporate powers are consistent with the purposes of this Act.

    Perhaps, a CDS spread greater than X could be considered.

  4. Carson Gross

    How much of the CDS spread was due to the now-proven-probably-correct assumption that there was no way in Holy Hell the government would let Citi fail? Looks to me like Lehman’s failure, which shook that faith, did a pretty damned good job of blowing out the spread.

    How can we rely on a market to price things correctly when the government is playing calvin-ball, and all the big boys know they won’t have to eat their losses?

    Cheers,
    Carson

  5. if i can post it once i can post it 1000 times… are these not the numbers???

    Its like you look at the numbers say only 10 trillion in guarantees and direct losses to the taxpayer ‘who wasnt paid to insure the risk, just looted’… say inflation is 3% a year buy you need to manage the portfolio ‘bill people’ so you want to charge 4% a year ‘hell you have to front the money’… say the last crash was o’ 79 years ago so we will set the cycle at 70 years…
    .

    http://www.csgnetwork.com/simpleloansintcalc.html

    10trillon 70years 4% = 400billion a year to insure against the losses…
    .
    its 70 years of protection, when you finally bankrupt your bank while earning 1million a year it will seem worth it ‘payments will seem more reasonable too, like 4% is a realistic spread’
    .
    or we could fail the 2big2fail vertically integrated political muscle machine when this is all over
    .
    but they plan to sell us all on McMansions ‘even if that means they need to raze them to avoid taxes’ so that we can enjoy a planned economy of foolish usury and entrapment.
    .

    .
    dont pay taxes, imean, dont pay insurance ‘or at least nearly enough’ its good for the economy

  6. Credit Default Swaps. They are called Credit Default Swaps. Economists want to spend half their time spouting acronyms and then they wonder why people get bored and aren’t better informed.
    Credit Default Swaps should be OUTLAWED. Credit Default Swaps should be ILLEGAL. If a banking executive even so much as says the words “Credit Default Swaps” he should be b____ slapped. George Soros says they should be outlawed. Warren Buffet calls Credit Default Swaps “financial weapons of mass destruction”, a “time bomb”, and has told the insurance segment of his company not to invest in them.
    We have probably the greatest investor in short term financial instruments/currencies (Soros) and probably the greatest investor in long term equities (Buffet) screaming to the media that Credit Default Swaps are garbage. Who we gonna listen to??? Soros and Buffet, or guys like Joe Cassano??

  7. We’re so happy the rating agencies can do more than collect payment from issuers and stamp AAA stickers on the products as they rush buy on the assembly line. Let us know all the updates.

  8. Of course you can design a system not to fail. You can’t put a rule on the inputs to an earthquake, whereas you can with any system. Currently, the market isn’t built to price things properly – there’s a disconnect. Now, the question is – can a system be created that incentivises correct pricing? That would create stability.

  9. Although ratings agencies are “providing more information,” they have maintained their unique status as the only third-parties that can assess risk. Entities are very often required by law to obtain their services–nice work if you can get it. Of course, the Obama-Geithner regime has proposed no reforms of the rating agencies. Is it because Warren Buffett owns Moody’s? Goldman-Sucks has sure made out well after the AIG bailout and Buffett’s infusion of cash into their organization.
    The new “reforms” were designed by Tim Geithner. He was the head of the Federal Reserve Bank of New York while Citi and other financial institutions were imploding. In fact, he wanted City to have Wachovia–can you imagine what that zombie bank would look like today?

  10. “And while leading critics of the administration’s proposed approach to rating agencies make some good points, they also seem to think that the market tells us when big trouble is brewing.”

    When E. F. Hutton speaks, people listen? Right!

    I suspect that they are right. Some people listen. Roger Babson got his clients out of the stock market in 1928. Martin Zweig called the crash of 1987. The current crisis was not unheralded. Alan Greenspan cautioned once about irrational exhuberance, and saw trouble brewing later but bit his tongue.

    Maybe when you hear, “This time it’s different,” it’s time to put on the brakes.

    “The WSJ gets this right: regulatory capture is not only pervasive, it is by design. But what’s the implication?

    “All regulators must ultimately fail and, when that happens, markets may well also misprice risk.”

    Maybe all regulators must fail, but what is the mean time between failure? 7 years? 10 years? 50 years? 200 years?

    “You cannot design a financial system that is immune to crash”

    You probably can. People might not like it, however. But isn’t it too soon to say? I have been looking at Kindleberger again, “Manias, Panics, and Crashes: A History of Financial Crises”. There is a long history of last minute efforts to avert or minimize crashes and crises. But not a long history of efforts to avert or minimize booms and bubbles. You have to have both. Was there any real effort to design a system to minimize the chance of crashes and crises before the Great Depression? And the design created in the aftermath in the U. S. seemed to work pretty well, until Reaganomics. We did not learn our lesson after the S&L debacle, but maybe we can learn something now. The regulatory structure put in place in the 1930s served us well for 50 years, and probably would have done so for rather longer. I say this time let’s shoot for 100 years. :)

  11. Richard: “Currently, the market isn’t built to price things properly – there’s a disconnect. Now, the question is – can a system be created that incentivises correct pricing? That would create stability.”

    The market is actually conceived of as a mechanism to price things properly. (You and I may disagree, but that is another matter.) The problem before us is a different one: prices fluctuate. The market is not a mechanism to control fluctuation. Crashes are not bugs, they are features.

    Incentives are not enough to prevent crashes. Short selling is not enough. Options and futures are not enough.

    Education might be enough. There is research that suggests that experiencing two crashes teaches people to control their exuberance. But as a practical matter not enough people can be trained. We need regulation and regulators.

  12. Would taxing at a very high rate upper end earners bring down the incentives/motivations to take exorbitant systemic risk?

  13. Robert Bell

    I thought Avinash Persaud nailed this last year. If you use market prices to assess risk, and market prices deviate from fundamentals, then ultimately you have no risk protection.

    http://www.voxeu.org/index.php?q=node/1029

    Having said that, given that prices are among the most widely reported and heavily researched data around, I’m not sure that any other method would be more accurate but nobody said this was an easy problem. It may also be true that there isn’t perfect synchronization between prices in different markets, so that examination of prices (especially in relation to fundamentals) in related markets may give an indication that prices in a particular market are out of whack …

  14. Alan McConnell

    I see that a previous commenter has already
    questioned Mr Johnson’s assertion: “You cannot
    design a financial system that is immune to crash”
    But surely an effort should be made to try.

    Messrs Johnson and Kwak have, with great insight
    and perspicacity, raked Obama/Summers/Rubin/Geithner
    over the coals for their efforts to “restore the
    financial system”. I would like to see them/us
    come up with constructive ideas about what is
    needed in a “financial system” and what is not.

    In an E-mail, James Galbraith queried whether
    anything that Wall Street does serves any social
    purpose. I suppose that we must have e.g. a
    stock market. And certainly insurance is
    necessary. But we, as a society, must really
    bend all efforts to make sure that no one — No
    One! — can f*ck with our money. Money is
    important, dammit. And it should not be beyond
    our wit to work toward a system where money is
    safe and serves the purposes for which it was
    invented. Money should not be a plaything of
    the Diligent Rich.

    Best wishes,

    Alan McConnell, in Silver Spring MD

  15. Old Lady in Red

    Doesn’t the Bible say, somewhere, you are not supposed to charge interest — at all?

    What do these flabby, white-skinned leaches actually contribute to make our world better, on any level?

  16. Badder Meinhof

    It’s not enough to capture the regulators – next these hookworms have to capture all of you.

  17. “Capture”—that’s nice lingo to prove you are up on current affairs. Like If I was Mark Sanford I wouldn’t say I “cheated” on my wife. I would say I was “philandering”.

    I would say: “Yes, I went to Argentina and I philandered in the Andes Mountains.”

    Capture is a nice way to say ENSLAVE. Mentally enslave.

  18. Bong Girl – So what would the information from “market implied ratings” say to consumers? Like those seeking to invest the retirement funds for teachers, etc.?

    How is this different from what the ratings agencies did before? Does this replace the AAA ratings people relied on to make their investing decisions?

    (Do you think this is a better way to rate investments?)

  19. Wasn’t the system fairly sturdy until the dismantling of Glass-Steagal?

    Weren’t there regulations in place at one point that prevented bankers from transforming into hustlers?

    I will be honest, I come away from this crisis wondering how sick the system really was. With GS announcing such enormous profits and so many banks saying they only took TARP funds “because Paulson made them do it” – it really seems like we invested trillions in order to prop up Citi, BoA/Merrill and AIG.

    I’d love someone to explain why I’m way off base in this sentiment!

  20. Sorry about that major typo. I realize you are not anywhere close to being a “bong girl. Many apologies! Need more coffee over here….

  21. Patrice Ayme

    Speaking of earthquakes, California is grossly unprepared (building codes are grossly inappropriate). Several big ones are expected anytime, and, if they struck in metro areas (one earthquake of more than 7 Richter is due in the central San Francisco Bay Area), they could kill many thousands (maybe up to 50,000). And what is being done? Well, the city of San Francisco has admitted that many thousands homes should collapse (due to their pathetically weak garages in front and below). And one is just waiting. Although the irony is that doing something about it would help the economy (11.5% unemployment in California, May 2009). This is a case where a state, and, or, federal mandate for more strongly built homes would enforce construction, spurring the economy, and saving thousands tomorrow.

    So why is nothing being done? Probably because construction by the people for the people does not particularly fascinate the plutocracy. What’s in it for the oligarchy? Nothing much (they live somewhere else in better homes). Actually spending money on housing for normal people would be as much money not going to banks, their bankers, and their shadows.

    Patrice Ayme

    http://patriceayme.wordpress.com/

  22. Market prices are supposed to reflect market risk, i.e. “fluctuations.” As you say, market risk is not controlled, but it is provided for, if imperfectly.

    This reminds me to update my home and auto insurance.

  23. Art: “Market prices are supposed to reflect market risk, i.e. “fluctuations.””

    If volatility increases, the average price goes down. Hmmm. Can you spell C-R-A-S-H, boys and girls?

    Volatility went up in September, 1987, before the crash in October. I remember. Thank you, Paine Webber.

  24. Anne, LOL – you aren’t the first to do that, and you probably won’t be the last :)

    The idea is that the “regular” ratings are based on the rating agencies’ own proprietary models for assessing borrowers’ willingness and ability to repay debt. The “market implied ratings” are the rating agencies essentially saying, for example, we rate this security AA, but it’s trading in the market (or default insurance is trading) like it’s rated a few notches lower (that is, market participants believe there is a higher default risk than the rating agencies do). The idea is that this would be useful for securities in evolving credit situations that are trading in their own world (think Lehman, or California).

    If you believe that investors actually pay attention to this stuff themselves (and that prices actually mean something), then the products are redundant. But, then again, the regular ratings would be as well.

  25. Eric Dewey, Portland, Oregon

    Indeed, negligence is a good description. Willful blindness is another.

    At some point, the prudent individual chooses to stop fighting against those who are praising the emperor’s new clothes.

    This doesn’t necessarily mean that they turn sycophant and join in the deception. It may mean simply that they make their own plans against the day the tide turns and the emperor is deposed for his shameful displays of public nudity. He thinks to himself, “Perhaps this current low ebb of the tide does not represent the full strength of the moon’s hydraulic influence.”

    The more individuals make such plans, the sooner the day of reckoning will come. This may not sit well with those who believe that noble causes should eventually prevail because of their nobility – but it is among the primary lessons of human history.

  26. Given the AIG bailout and money being spread everywhere to cover the CDS contracts it issued, what mug would ever wish to bet their company on the prospects of Citi surviving another year without government assistance.
    indeed, forget short sellers, we should all take CDS contracts out on Citi, when it eventually fails, I doubt a single entity will get an insurance payout – AIG all over again.
    These instruments should be banned, or at least restricted in their actual use, it was one matter to insure local government bonds, a good thing, not so good to actually force businesses to go under rather than let them reorganise their debt obligations.
    Still I note Wall Street and the City of London are in for bumper bonuses, evidently, Lehman’s demise and the concerted global government bailouts were just a dream.

  27. For those wishing to learn more about Credit Default Swaps and how to trade them profitably, I recommend the Lehman Brothers Guide to Exotic Credit Derivatives. Man I wish I had a first edition of this seminal tome.

    http://www.investinginbonds.com/assets/files/LehmanExoticCredDerivs.pdf

  28. Of course. And I think subsequent pricing (within what, six months?) proved that that pre-crash pricing adequately reflected the risk. So far I do not see here or anywhere else how you can mitigate the risk in the manner we’re hoping. We all want the returns but not the risk.

  29. So in a bubble environment, these ratings would presumably be higher than the agencies’ own assessments. I wonder if this would only encourage buyers to rationalize buying at higher prices.

  30. I have a question you may know the answer to –

    Why are buyers who relied on credit agencies not litigating against those agencies for gross negligence and/or corruption? Are those contracts litigation proof? Can they allege fraud? (e.g. the agencies fraudulently granted inflated ratings in order to attract revenue, and failed to do proper due diligence). Even compared to the bailed-out banks (which have suffered only modestly), the ratings agencies seem to be getting a free pass. Why?

  31. If people are paid too much they end up not caring about their jobs.

  32. AIG was a vehicle for channeling tens of billions to other companies. It was an insurance company, duped into trading what effectively were options contracts (as others on this blog have noted) that they _thought_ were insurance contracts (largely due to ratings agency failures), then left holding the bag – but AIG really was too big to fail. Moreover, its liabilities were driven by a relatively tiny arm of the company.

    In that sense, AIG was the system. Had AIG really gone under, and all those contracts were left unfulfilled, the results would have been spectacular.

    Oh, and if we rebuild Glass-Steagall, we ought to put into place some separation between real retail insurance and options trading.

  33. Breaking new John & Kate information! Reports are saying that they just killed the Lochness Monster on their recent honeymoon!

    http://knowledgementco.wordpress.com/

  34. Actually it is a great question , which leads to all sorts of other questions about how and why no one else is litigating (which is about the only “successful” voluntary reglation of the markets I can think of). My gut level response is that no one wants to litigate because they don’t want their own mistakes and misdeeds thrown about for all to see. Of course, as a certain South Carolina Governor can probably attest, those things tend to surface eventually anyway.

  35. A one who has experience in disaster mitigation and response, CA isn’t really that bad when it comes to earthquake mitigation.
    Because it is impossible to predict exactly when and where the next “big one” will happen, gradual mitigation measures is appropriate to keep cost down in the short term, so long as the locals use their best judgment to get the most protection out of the funds that are available at a given time. For example, CA actually does have earthquake appropriate building codes currently in effect for new construction. It cost them very little up front, and this allows disaster assistance money to rebuild old structures to the new code. Louisiana attempted to upgrade building codes after Katrina, which is expressly forbidden by the Stafford Act, which has caused some of the many problems with the recovery from Katrina.

    It is true, however, that a major earthquake occurring now would be more destructive than usual because government would not be in a favorable position to fund rebuilding. But keep in mind that local geology is much more of a control when it comes to earthquake damage than the magnitude of the quake itself (the Richter Scale is no longer used). The Northridge quake was a magnitude of something like 5.2, but the damage was severe because of local geology, which included a wave-focusing lens effect and soil liquifaction.

  36. “You cannot design a financial system that is immune to crash”

    You probably can. People might not like it, however. But isn’t it too soon to say? I have been looking at Kindleberger again, “Manias, Panics, and Crashes: A History of Financial Crises”. There is a long history of last minute efforts to avert or minimize crashes and crises. But not a long history of efforts to avert or minimize booms and bubbles. You have to have both. Was there any real effort to design a system to minimize the chance of crashes and crises before the Great Depression? And the design created in the aftermath in the U. S. seemed to work pretty well, until Reaganomics. We did not learn our lesson after the S&L debacle, but maybe we can learn something now. The regulatory structure put in place in the 1930s served us well for 50 years, and probably would have done so for rather longer. I say this time let’s shoot for 100 years. :)

    This is one of the central arguements of most ordinary citizens who are finally looking at this debacle. It seems that, when confronted with a crisis or a need for action, politicians alwasy respondin by initiating something new, as opposed to looking at previous efforts and whether actually doing what’s already on the books would do the trick. So much intellectual capitol wasted at the wrong time.

  37. I prefer “malfeasance.” its a far more accurate word in the context of the collapse of the financial industry.

    Of course, how do you define a collapse whne trillions of dollars have gone to that sector and it decides to give raises from that money because bonuses are now taboo . . . .

  38. Patrice Ayme

    The lack of preparation in California is blatant, especially in comparison to Japan (which has scrambled to improve its already good constructions since Kobe).

    The Northridge earthquake occurred on January 17, 1994 in Los Angeles, lasting for about 20 seconds. The earthquake had a “strong” moment magnitude of 6.7. The ground acceleration was one of the highest ever recorded in an urban area in North America: one g. Seventy-two deaths were attributed to the earthquake, with over 9,000 injured. The earthquake caused an estimated $20 billion in damage, one of the costliest natural disasters in U.S.A. history.

  39. So if the system is one company – AIG – why did Goldman Sachs, Northern Trust, JP Morgan Chase and all the other (now very healthy, profitable) companies need to get billions in no-strings-attached money? I still don’t understand that. Why not just prop up AIG with the dough? (Which they did anyway.)

    And are GS, JPM and all the others paying any interest on this money or are they paying back only the exact amount they received?

  40. Alan McConnell

    COMPLAINT: I tried to leave a comment. I
    wrote it, hit Submit, and was told to review
    my comment. I did, it looked OK, so I hit the
    Submit button again. I got a message: “You’ve
    already submitted this” — which indeed I had.
    And now my words of wisdom have vanished down the
    memory hole.

    Can someone review, and then explain to all, the
    comment-submitting process?

    TIA, Alan McConnell is Silver Spring MD

  41. > And if you can tell me how Citi survives going forward with a CDS spread around 450 basis points, I would be grateful.

    Nobody at this point believes that Citi will fail Lehman style. The US Government all but owns Citi and has all but guaranteed it. As an ongoing concern — ie in terms of making payroll and paying their counterparties — Citi has cash and liquidity.

    Citigroup CDS could pay out if there is a technical default. This could be triggered due to a restructuring (ie forcing some debtholders to pay out) or nationalization. This is probably driving demand for Citigroup CDS.

    There are other reasons why the CDS spread may not represent fundamental risks.

    In terms of substituting CDS spread for ratings, I’d also like to point out that the CDS market is a poor one at times — it can be highly illiquid (or not exist for many names) and as such it can be manipulated. (If few CDS contracts are traded on an issuer — and this is true for most medium sized and small companies — it would be easy and legal to manipulate the spread with a large bid or offer.)

    Oh, and if you can tell me by what mechanism Citi _would_ fail due to its high CDS spread, I would be grateful.

  42. i don’t buy that. the government has pumped about 200 billion dollars into the system — the world financial system, including many european banks and some US municipalities — not just the US banks — through AIG. 200 billion is a lot of money but not enough to have made the difference between what we had and a spectacular failure.

    at the very least the treasury could have bailed out AIGFP (the group that wrote all the CDSs) and let the rest of AIG go into bankruptcy.

    i think there are several answers to why AIG was bailed out — i don’t want to get into that. but from where we sit now, i think the evidence is that letting AIG would have made things worse but not catastrophically so. of course nobody knows….

  43. anne, two things:

    first, in terms of the TARP money, many of the banks did not want it. treasury secretary paulson decided that everyone should get them because he didn’t want to tell the world which banks the treasury thought were in terrible shape. in retrospect this strategy didn’t work all that well anyway as everyone “knew” the answer anyway.

    in addition, many of the banks would have had serious liquidity difficulties last year because they had trouble raising money (ie issuing bonds) from private investors. so they were allowed to raise these funds with FDIC support — essentially with a government guarantee. i don’t know the terms of this, whether the banks are paying an insurance premium for this guarantee or not.

    and yes, the banks are paying interest on the money (i think 6%) and this is one reason they want to pay it back.

  44. This all goes back to the idea that ratings are just opinions, not financial advice or appraisals.

    If you look at a ratings report where a rating agency justifies the rating it has given, it will say as much. For example, here is the disclaimer from a random S&P Ratings Services report on my desk: “The credit ratings and observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision … Ratings Services receives compensation for its ratings. Such compensation is normally paid either by the issuers of such securities or third parties participating in marketing the securities.”

    The problem is, even if the rating agencies view their “opinions” that way, others have given the ratings a special status (e.g., policymakers in using ratings as a proxy for creditworthiness in defining eligible investments in regulations or market participants when they are selling a specific security to an investor).

  45. I question the entire rationale behind the CDS. But, if ratings matter normally, I believe that it requires a crystal ball to assess the risk of the CDS, since it’s entire viability seems to rely mostly on the condition of the market place, and other competing investments. That is aside from the ratings issues with the securities involved in underpinning the CDS’s, which, if not rated properly, act as a multiplier of any negative effect of market displacement, and do little to ameliorate the efficacy otherwise. In other words, their effect in the market seems heavily weighted against successful investing. It seems that they are akin to kiting checks into new accounts repeadedly to make money. Why not stick to investing in bonds with keener and more transparent underwriting. The “old fashioned” and presumably “less creative” products should always produce more stable markets, if regulated properly.

    One of the key issues going forward is keeping the ratings agencies honest. This means not allowing them to work for the product issuers, and “back checking” their rating processes regularly.

    As far as Citi goes, they are in as much trouble as all the others who still horde toxic assets in the non-MtM portfolios. It is now a race to the finish line. Where the overall economy goes from here will determine if all, or any, win.

  46. @Bond Girl

    I just realized the pun in your handle. ;)

  47. Richard Hogesteger

    Regulatory capture is not inevitable and not all regulations fail. It is the result of how our political system works. When the United States was created one fear of the founding fathers was that the common people, by which they meant tradesmen and small farmers, would take over the government and redistribute wealth. To prevent this they deliberately created a political system in which wealth was a necessary element of political power. Politics is expensive in America in a way that is not in many other democracies. The obvious alternative to the American way of politics is Canada where election campaigns are short, political parties receive government subsidies and banking regulation works. Regulatory capture is only inevitable when politicians must raise huge sums of money to run for office.

  48. Another vote for publicly financed campaigns. This should only be a referendum, because Congress will never pass a bill to do it. However, the self-serving attitudes in Congress seem to rise more to the public notice every day, so revolution becomes more of an issue. A larger full-scale collapse will ensure this.

  49. Art: “Of course. And I think subsequent pricing (within what, six months?) proved that that pre-crash pricing adequately reflected the risk. So far I do not see here or anywhere else how you can mitigate the risk in the manner we’re hoping. We all want the returns but not the risk.”

    The crash of ’87 did not kill the economy, so I am not sure if it should have been curbed. Still, if it mattered, measures could have been taken to rein in speculation.

    And I am quite skeptical of the idea that reasonably astute regulators can’t smell these things. In the spring of ’87 even I, whose long suit is definitely not fundamental analysis, could tell that stocks were overpriced.

  50. StatsGuy: “Oh, and if we rebuild Glass-Steagall, we ought to put into place some separation between real retail insurance and options trading.”

    Yes. If we look at sustainable complex natural systems, we see not only expendable components, we see specialization with niches and organs. Such systems are inefficient, but inefficient in a good way.

  51. Tippy Golden

    Can someone explain what this means:

    Citi has a CDS (Credit Default Swap) of 450 basis points (45%)

  52. That sounds like a software glitch to me. I have never been asked to review a comment on this or any other WordPress.com blog. We do not moderate comments. There are only two reasons why a comment should not appear: (1) the spam filter (which makes mistakes sometimes) and (2) I have flags set up on a few words (profanity, insults) that force moderation.

    It sounds like your first comment got saved somehow, and when you tried to reenter it the system was unhappy. One workaround if that happens again might be to edit your comment slightly so it does not look like a duplicate.

    Do other people get asked to review their comments?

  53. 450 bp = 4.5%. That means that if you have a Citigroup senior bond with a face value of $100 and you want to insure it against default for 5 years, you have to pay $4.50 per year.

  54. I found your comment in the spam filter and freed it. Approximately 3-5% of the comments that go into the spam filter are actually real user comments. I check it every few days to rescue them.

  55. Tippy Golden

    Thanks James

  56. Pingback: Impressions for 06/26/2009 « Lasting Impression

  57. The ratings agencies tell you it is an “opinion” so they are not sued if you lose money. They want to be paid for the ratings, but the agencies don’t want to be held responsible if you lose money on something they gave an AAA rating to. If it is “SOLELY statements of opinion” they can’t get sued because it takes away their First Amendment (free speech) rights.
    It’s lawyer language for “You Sons of B’s can’t sue us if you lose money”