"Assuming the project basket was wisely selected (not too much of the required pork)..."
Slap:
Why public debt is good?
Last night, I was at a Board of Education meeting, and the subject was public debt.
Montgomery County Maryland figured out that they could make big strides on their school construction backlog by borrowing more money to get cheap contracts now (30% below three years ago, with all energy factors included).
Assuming the project basket was wisely selected (not too much of the required pork), the taxpayers, and jobs should do well.
Who but government could do this?
Steve
Isn't that what the British call the rub?
"Assuming the project basket was wisely selected (not too much of the required pork)..."
There's one problem: Politicians are humans.Originally Posted by Steve the Planner
Sure, you can calculate that it's economically and fiscally superior to accept some debt now, invest and pay back with the fruits of the project.
Politicians are great in at the "add debt thing". They're not o great at the "invest" thing. Finally, it's the exception of the rule if a politicians does the "pay back" thing by himself, without being forced to do it.
Good intentions - human imperfection - poor result.
Besides; the U.S. is a deficit country (state, federal public debt & consumer debt). That is not sustainable. A "balance" attitude is necessary or else all you'll get is a bit make-up that covers the real problems till the next, bigger crash.
The financial crisis with all its disgusting stories is just a symptom, after all.
I can't argue with ....
this one:
Hopefully (neither plan nor stategy), the "next, bigger crash" will not occur; but I expect exactly that to happen.from Fuchs
Besides; the U.S. is a deficit country (state, federal public debt & consumer debt). That is not sustainable. A "balance" attitude is necessary or else all you'll get is a bit make-up that covers the real problems till the next, bigger crash.
The example used by Steve is more likely to occur at the local level (municipal) with effective governance based on personal fiscal responsibility. Even at the local level, there are vast differences between municipalities (those who feed at the trough and those that don't). From a larger view (Fuchs as to Federal, state and national consumer debt), those fiscally-responsible munis will not affect that picture to any significant extent.
Regards
Mike
Everything you wanted to know about economics..........
......but were afraid to ask.
Absolutely comprehensive economics videos. I believe his analysis to be objective with the purpose being to educate.
Khan Academy: http://www.khanacademy.org/
Also RAND Organization produces some outstanding publications. (Ignore the price/add to cart and go to the pdf download)
"A nation that makes a great distinction between its scholars and its warriors will have its laws made by cowards and its wars fought by fools."
— Thucydides
Do you folks think there's a need for a layman's guide to global finance, written with an eye towards a security/defense audience? Could cover things like the potential impact of a shift in global reserve currency, impact of oil volatility, touch upon sovereign wealth funds, things like that...
You should look at trade balances instead.
Finance is 99.9999999% illusion and 0.0000001% paper.
It would probably useful, as 90% or more of what's written for the layman on the subject is agenda-driven nonsense. Of course many who read on the topic seem primarily interested in hearing what they want to hear, so the agenda-driven stuff often makes them happy.
Still Report #12
Bill Still was down my way recentlyso here is the Still report#12 on the Economy.
http://www.youtube.com/watch?v=QYIhc3GyANI&feature=sub
One quibble. States by law (1 exception) are not allowed to run a deficit. States are required to balance their budgets and even scope spending quarterly based on realized tax revenues. There is also a difference between a deficit and debt. A deficit is when you spend more money than you take in. Debt is when you owe on some asset. Consumer debt isn't necessarily bad some forms are actually good (when used for realized goods or balanced by real property value). A deficit is usually a political football depending on where you allegiances lie. A deficit can be a moral issue, or an economics issue with flavors of each blending between the two.
Sam Liles
Selil Blog
Don't forget to duck Secret Squirrel
The scholarship of teaching and learning results in equal hatred from latte leftists and cappuccino conservatives.
All opinions are mine and may or may not reflect those of my employer depending on the chance it might affect funding, politics, or the setting of the sun. As such these are my opinions you can get your own.
Goldman Sachs Sued by SEC for Fraud Tied to CDOs
Decent backgrounder from McClatchy.Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped.
Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the Securities and Exchange Commission said in a statement today. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs.
“The product was new and complex but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami said. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.” ...
Just a civil case, so no perp walks anytime soon, but it's nice to see at least someone being brought to book for their willingness to blow up investors (and the entire U.S. financial system in the end) at will.
Just to pimp this great Propublica piece one more time, the parties involved (Paulson & Co and Goldman) were doing a variation of the Magnetar trade - creating a CDO designed to fail, selling the CDO to investors, and buying CDS insurance to profit from its failure. Paulson as the driving force, with Goldman as enabler and marketer to the investors. Goldman is being sued by the SEC for essentially hiding information/lying to investors.
Related -
Will the great recession lead to World War IV?
Global stagnation strengthens the nationalist right everywhere, potentially leading to a whole new kind of cold war
http://www.salon.com/news/opinion/fe..._iv/index.html
A scrimmage in a Border Station
A canter down some dark defile
Two thousand pounds of education
Drops to a ten-rupee jezail
http://i.imgur.com/IPT1uLH.jpg
A friend of mine sent me this. I am not usually a der Spiegel fan but I thought that this was a very balanced article and well written, not to mention scary.
“Build a man a fire, and he'll be warm for a day. Set a man on fire, and he'll be warm for the rest of his life.”
Terry Pratchett
I haven't read through any of the documents on this yet. But my first impression is: "isn't this what a market maker does?" When dealing with sophisticated investors, generally you don't need to spend lots of time worrying about whether that investor has made a reasonable assessment of risk exposure - it's assumed that they're capable of doing it themselves, hence the characterization of "sophisticated investor." I guess I don't understand why this is an issue.
That's not a defense of Goldman, but just an initial reaction. Am I overlooking something?
Originally posted by Schmedlap:
I'd say you are probably technically correct, except the original intent of a "market maker" as I understand it was that a "market maker" was not only to 'make a market' in a number of stocks (or commodities, etc.), but also to stabilize the market when imbalances occurred. Except it looks like GS & their fellow Wall Street trader types decided that it was immensely more profitable to "game" the market, by creating built-in "imbalances", so the other party would profit at the expenses of the sheep being sheared and gutted. The only problem they had is they (GS) lost money because they couldn't offload the slop fast enough, and had to hold onto part of the position, and it tanked on them.I haven't read through any of the documents on this yet. But my first impression is: "isn't this what a market maker does?" When dealing with sophisticated investors, generally you don't need to spend lots of time worrying about whether that investor has made a reasonable assessment of risk exposure - it's assumed that they're capable of doing it themselves, hence the characterization of "sophisticated investor." I guess I don't understand why this is an issue.
That's not a defense of Goldman, but just an initial reaction. Am I overlooking something?
After all, the best road to making a sure profit is a sure thing. And it looks like this particular game was rigged from the start.
Having spent time in the recent past making regular daylong visits (once a week) to a Federal court building located downtown in a very large jurisdiction for almost a 2 year (22 months) period, I can tell you that these folks better be hitting their knees praying every single night (and morning) that the DOJ doesn't take this type of case in front of a federal GJ as part of a criminal investigation, because IMO, it's going to be even money (at worst) that indictments would get handed down.
Particularly if they (as witnesses) responded to GJ member's questions the way they responded to the Senators questions. Splitting hairs isn't the smart move in that type of environment.
That's not to say they would be convicted - that's not the responsibility of a Grand Jury. But if you are a big financial firm, those indictments would be the kiss of death.
IMO, it isn't over - not by a long shot.
Interconnectedness..
From the NYT, The Euro’s Lost Promise, By DAVID MARSH
Published: May 17, 2010
The underlying story of how 16 diverse European currencies were fused into the euro combines the contorted fortunes of two powerful German politicians who sought to tame Europe’s past and shape its future, along with a French president who wished to fasten economic shackles around the might of a reunified Germany. Ultimately, too, it is the story of how the Old Continent struggled to break free from the uncertain political and economic embrace of the United States.
The pivotal moment in the formation of Europe’s monetary union came in December 1991 at a meeting in Maastricht in the southern Netherlands. Two years after the fall of the Berlin Wall, European leaders set a political path toward a Europe-wide currency — a holy grail that had been pursued since the Roman Empire. The new money would complete the European program of liberalized cross-border trade, promote the old dream of political unity, rival the dollar as an international reserve currency and — the most complicated objective — prevent an enlarged Germany’s domination of Europe by bringing its currency under European control. The mighty Deutsche mark needed to be cast into the furnace of European unity and forged into the euro.Yet even as it predicted the trouble, Germany failed to anticipate that the countries running a trade surplus would inevitably need to finance the southern states’ shortfalls. The five most heavily indebted euro members owe German banks an estimated 700 billion euros (nearly $900 billion), and these German surpluses, once regarded abroad as a symbol of great strength, have emerged as a dangerous source of vulnerability. Most sickeningly for the Germans, the indebted nations are likely to say that their debts need to be reduced or restructured in the name of European solidarity.
A German revolt against the attenuated independence of the European Central Bank appears likely, and could jeopardize parliamentary approval for the rescue package. The Germans feel mistreated by a monetary system that makes them pay for others’ largely self-inflicted misfortunes.
And the trouble is far from over. The austerity programs for errant southern states ordained by European governments and the International Monetary Fund are likely to lead to severe unemployment and civil unrest. Some southern euro members may choose to return to their former currencies — or they may be asked to do so by other states.
Sapere Aude
A couple of things.
GS was not just out there posting market prices and collecting the tolls on a liquid market, like vanilla bonds or stocks. GS created Abacus, helped stuff it (knowingly) with synthetics that referenced crap securities, and pushed it to investors without advising them that it designed Abacus at the request of John Paulson specifically so that it would fail and fail badly.
There was no "market" in Abacus to make. GS had a time bomb it wanted to sell because it thought it would make money from the explosion, and it hid information in order to sell it.
I'm not one to assume Goldman is not underhanded and unethical, but I am very hesitant to accept that they were so stupid as to do something this big if it breached such a fundamental issue as materiality. If I can be humored in my role of devil's advocate one more time...
But aren't sophisticated investors assumed to know the risks inherent in this? Aren't they expected to recognize extremely high risk (or crap)?
What does that mean? Somehow forced it upon them? Lied about what synthetics were in the CDO?
Not identifying Paulson by name seems like a normal - or at least reasonable - business practice. It seems fairly obvious that there was one or more counterparty to the trade. Or am I assuming wrongly?
This seems to be the most problematic assertion. How certain can one be that an investment is going to fail? And even if you can be 99% certain, aren't there always going to be investors in a raging bull market willing to take the bet anyway, either in search of high risk or in search of a hedge against other bets they've made on that sector of the market going in another direction?
If the investors know what the CDO was composed of, then I don't see how the assertion of hiding information can survive. "Here's a product and here is what is in it" - a sophisticated investor should be able to weigh the risk of that without knowing, "oh, by the way, John Paulson (or Warren Buffett or George Soros or the old lady down the street) is on the other end of this deal."
Sadly many institutional investors are not really all that sophisticated and often take the legal minimum amount of due diligence. For some the AAA rating slapped on the upper tranches of Abacus and other CDOs by ratings agencies paid for by the banks is enough.But aren't sophisticated investors assumed to know the risks inherent in this? Aren't they expected to recognize extremely high risk (or crap)?
Sold it to them through a combination of ratings agency gaming/corruption, old fashioned salesmanship, and purposely making the CDO and its prospectus radically complex. Obfuscation through complexity is part of the plan --- it allows GS to pose as a knowledgeable adder of value rather than a snake oil salesman, allowing for higher fees and simultaneously lulling the investor into a false sense of security. As a Bankers Trust salesperson once said about the clients: "First you lure them into the water, then you #### 'em."What does that mean? Somehow forced it upon them? Lied about what synthetics were in the CDO?
Incorrect. What went on here is that Goldman helped ACA, the CDO manager, form an entity called Abacus which then issued securities. Goldman employed ACA to help manage Abacus and underwrote Abacus' securities, which formed the CDO and were then sold to investors. Paulson technically was on the buy side just like the investors --- he was an investor, the guy who bought the highest-risk tranches. Except Paulson and Goldman both knew that Abacus' securities were never meant to pay off in full but rather chosen instead to go bust.Not identifying Paulson by name seems like a normal - or at least reasonable - business practice. It seems fairly obvious that there was one or more counterparty to the trade. Or am I assuming wrongly?
Certainty is never there, but investors who bought the upper levels of these CDOs were not looking for wild gambles. The super-senior and senior tranche buyers were often limited by law from buying anything not rated AA+ or higher.This seems to be the most problematic assertion. How certain can one be that an investment is going to fail? And even if you can be 99% certain, aren't there always going to be investors in a raging bull market willing to take the bet anyway, either in search of high risk or in search of a hedge against other bets they've made on that sector of the market going in another direction?
Now why the upper tranches of Abacus CDOs were rated highly is another story, one for the ratings agencies to answer, but a large part of this is also due to gaming by the banks. The ratings agencies published their risk assessment models for CDOs to show how transparent they were --- this allowed quant guys on CDO desks to design tranches that would rate highly in the model as opposed to reality. Also a lot of guys on these desks were former ratings agency employees, and a lot of ratings agency employees hoped to move onto trading desks at big banks, so a certain amount of insider knowledge and collusion is present as well. This is not a particularly large community.
GS took advantage of its pose as a neutral underwriter of Abacus' securities in order to act as an agent for another client, John Paulson. It should have disclosed that it was not a neutral underwriter, but rather acting for Paulson in setting up Abacus.If the investors know what the CDO was composed of, then I don't see how the assertion of hiding information can survive. "Here's a product and here is what is in it" - a sophisticated investor should be able to weigh the risk of that without knowing, "oh, by the way, John Paulson (or Warren Buffett or George Soros or the old lady down the street) is on the other end of this deal."
Felix Salmon has the Abacus prospectus here, you can peruse for yourself.
Regulatory Capture
SEC 'Revolving Door' Under Review, by Mcginty. The Wall Street Journal, 16 June 2010.
A Senate panel asked the Securities and Exchange Commission's inspector general to review the agency's "revolving door," which shuttles many SEC staffers into jobs with the companies they once regulated.
In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC's Division of Trading and Markets who took a job with a prominent high-frequency trading firm.
That move coincided with a continuing SEC examination of how high-speed, computer-driven trading in stocks and other securities is affecting markets.
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