http://knowledge.wharton.upenn.edu/article.cfm?articleid=2259

Register them or ban them.

Yes I was perhaps over simplifying things here and there and although I might lack the knowledge and exposure for an in depth analysis, this is what I think:

I’m quite sure that you’re well aware of the case of AIG when it had stopped its trade in CDS. They were insuring dangerously toxic assets which went against the basic fabric of the system. Only a 5-10 percent of subprime loans were to be insured but by the end, they had an aweful amount of exposure and apparently very few people even inside the org knew of this!

And when I said ‘big firms did not know to manage risks properly, its solely because they didn’t understand the concept and the depth of risk such instruments carried’ I MEANT they didn’t understand what was going on let alone manage it.

We also cannot discount the roles of the rating agencies which, again grossly oversimplified the co relationing between scenarios which led to a lot of unworthy securities being passed off as AAA.

Please also keep in mind that the thin red line separating the wall st and the gov is often faded. Both are dependant on each other for their survival. And although you’re very correct on TBTF, I don’t think anything plausible would be done atleast in the US. ING was broken up by the EU but do you think, Tim would take steps to break up Citi? I think not.

As I mentioned earlier, every war has its casualities. Does the onus lie solely on the lender? I’m not sure although this might qualify for a chicken and egg paradox. I do remember reading that ‘What’s good for Wall St. isn’t good for the country.’ Maybe, but I don’t think anything can be changed now as they’re back with a bang and they’re back in full force!

After all, pelnty of people owned homes in the Dark Ages before securitization took root, and home prices were much more reasonable then relative to median incomes, probably because a lot less (borrowed) money was chasing property.

Would you mind expanding on:
1. how this evolved and the reasons a lot of allegedly intelligent folk became and remained oblivious of the concept and depth of risk or prudent management of the risk?
2. what were the missing elements on both sides of he trading equation?
3. what precisely were the missing controls (if any)?
4. what are the fixes required to better manage the derivative risk trading products from this point?
5. what is the required process to rerail the concept and depth risk train?
6.What process do you envisage is the best cleanup process?
7.what should be done to ensure our community is shielded while the reckless, imprudent few ‘crash in a corner’?

I note your dismissal of TBTF, however with no supporting data, it seems like another summary opinion, which you have a perfect right to express but others may remain unconvinced. If TBTF is not really a problem, presumably you see some TBTF scale benefits which exceed the costs for our community?
Now exactly to what extent is scaling up an advantage? Who receives the advantage fruit? I note a recent video clip where the GS CEO Mr. Blankfein commented on the success GS was having and his duty only to his stockholders. Good stuff (for GS and the deil take the hindmost?), but if there are no ethical principles or regulations reasonably managing untrameled exploitation, we have a situation which the community may well be damaged?

If the sky is the limit, please comment on how you see the counterparties prosper? A sustainable business is presumably where both parties receive a benefit.

The current fiasco is not because big firms did not know to manage risks properly, its solely because they didn’t understand the concept and the depth of risk such instruments carried. I would like to quote the example of Goldman when it comes to having an intricate knowledge about the concept of risk in whatever they deal with.

And finally, James, lets just put the argument of too big to fail aside for a while. Yes, we do concede that too big to fail has been the limelight of all the Fed’s action plans. But looks like every second post of yours, focuses on too big to fail. It just gets too boring and monotonous after a while! Yes, we DO get the idea but I’m not too sure if THAT’s the ONLY thing we need to crib about.

Securitization of loans did help provide necessary funds to the market. However, multiple hedge derivative bets against those securities did not and do not provide the public any benefit. I can see value for one and only one hedge being placed against a mortgage backed security, as insurance. Multiple bets and claims against the same mortgage, particularly one sliced and diced and wrapped in a pool with hundreds of other mortgages is just a fraudulent game.

They are like heroine addicts (and others) who develop high tolerances for risk to support their (unsustainable) habits. Big is good for them, and can be (and maybe will be) disasterous for those who just want to earn a reasonable living without worry.

I prefer to think that the reformed Alan Greenspan and Paul Volker know that the bigness is very dangerous to our fiscal health.