Dec

13

 Now watch 'laissez faire' or 'market fundamentalism' take the rap:

12 December 2010

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

You report that Goldman Sachs, JPMorgan Chase, and Morgan Stanley are using their influence over newly established derivatives clearinghouses to line their own pockets by suppressing competition ("A Secretive Banking Elite Rules Trading in Derivatives," Dec. 12). Now THAT'S a shocker!

Who would have dreamed that these politically connected Wall Street behemoths, after being bailed out with taxpayer money, would now be able to rig – for their own monopolistic advantages - the operation of the clearinghouses that our very own, democratically elected government engineered into existence in the wake of the 2008 financial meltdown? Surely you're correct to describe this surprising phenomenon as an "irony."

What bad luck.

Sincerely,

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
 

Gary Rogan writes: 

Besides the crony capitalism aspect solving the following concern:

"A major concern during the meltdown was that no one — not even government regulators — fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds."

with this result:

"They also share a common secret: The details of their meetings, even their identities, have been strictly confidential."

is indeed ironic.

On a related note I happen to be reading "Crisis Economics" by Nouriel Roubini and Stephen Mihm and they dedicate page 201 to the wonders of derivatives exchanges. With comments like "This idea makes perfect sense, as exchanges guarantee that derivatives will be cleared and settled in a straightforward, transparent fashion." and "In return, the clearinghouse would assume the burden of the contract in the event the counterparty failed. All this helps reduce the problem of counterperparty risk" and the rest of its statist analysis it proves one more time that one should never trust anyone who regularly goes to Davos.


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  1. Nick Pribus on December 14, 2010 11:04 am

    There are some things so obvious they remain invisible until someone tells you. I just discovered that Casey Kasem is the voice of Shaggy-and it is so obvious now that I know-how could I have not known that all these years.
    The Big Short by Michael Lewis was a page turner beginning to end I couldn’t put it down because the stuff was so obvious, but then how is it that just a handful of really clever people ever got it? That “AAA” -the same rating conferred on the US government also applied to tranches of $700,000 home loans to immigrant agriculture workers earning less than $20,000 a year, or to multiple no money down loans for Las Vegas strippers buying their 5th rental condo? Bill Gates and Warren Buffet also had triple A, they were indeed in good company.
    The Big Short like the new Wall Street-where Michael Douglas was brilliant- brings back memories to we traders at heart like where we were when Kennedy was shot (sorry-not born yet), or when the Challanger blew (driving home from a racquetball match with my brother), or 9/11 (test driving a car for my wife). Where were we when the Fed decided to bailout AIG and when we all finally realized what “AAA” meant?
    I was in NYC at the time unsuccessfully pitching my Kazakhstan private equity fund to a rather distracted group of investors which until as recently as August had included sincere interest from Lehman. Tuesday September 16 the fate of AIG and that of western civilization if you believe some pundits hung in the balance and I sided with the pundits going out on margin for 3-1 odds on an AIG straddle, the payoff if the Fed decided the save AIG and the world. The next three days over coffee and wireless in a corner of the Helmsley Palace lobby (my wife and daughter were sleeping upstairs) I frantically liquidated the AIG position and another 30% of my longs (not enough) into strength following the news.
    The five stages of grief in the five days of September 2008 that changed the world. By the end of the week I had gone from optimistic, to frustrated, to gambler, to dejected to relieved, and finally to unemployed as my business partner pulled the plug on further efforts to raise private equity.
    So instead I went looking for the next big thing, that thing that is so huge and so obvious nobody in the world can see it.

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