Monday, March 26, 2012

Ben's Lectures III

Moral: Wherein we continue with Ben's look at the mess and its aftermath (do we want to know what roles contributed to the problems and the lessons to be learned by those involved?).

---                       Lecture 1Lecture 2, Lecture 3, Lecture 4

Foreword: Today was the 3rd (on youtube, transcript (pdf)slides (pdf)). The first two lectures were on 3/20 and 3/22. Material (video, transcript,slides) are available at (media center). There will be one more after today. These are being hosted by the George Washington University School of Business. The following are notes and comments that were taken while watching the third video today. See earlier Lecture posts for background.

Note: Since both the transcript and the slides are available with the video, the below notes are terse entries to jog my memory later on. Ben did a good job of talking about the crisis, gave his side of many of the stories (information not available through the press), and supported the actions. He used 'ad-hoc' several times which is in his favor. He expressed the distastefulness of what they had to do (I agree). Next time, he'll talk the future.


Notes (italics, my aside, sometimes with links - times are clock - CDT):

Last time, we heard about the onset of the crisis. Today, we'll hear 'what he did next' from a prime player.

Ben reminded of the context, the 2008 financial crisis. Too, there are two responsibilities. For the financial stability task, the thing is to act as lender of last resort. For the economic stability task, the focus is on monetary policy, principally interest.

~11:47 -- recap on vulnerabilities (see Lecture II), there were both private and public
     private -- too much leverage (result of the long-going moderation?), exotic securities
    public -- gaps in regulation, even fannie & freddie
      they pioneered securitization, using morgages for packages, but f & f' got to where
         they operated without adequate capital, and other problems that portended problems

     (this was seen, by many, long before the crisis --
                     it would be interesting to list those discussions)
        also, f & f' started to buy packages from others, of unknown value

        on triggers     mostly non-standard mortgages
              payments assumed rising house prices, anytime re-financing (post a year, for example)
                many types, ARM, option-ARMS, too long term 30+ years,
                      even negative amortization

         showed a couple of ads, one offered this: 1% start rate, for a year, only needed to
                   state income (no documentation required), 100% financing, interest only
                           (get this!) debt consolidation (put together your credit card and other debt
                                           rolled into the mortgage)

    so, these things were packaged and sold into the financial market
                    (2011 - Tranche and trash, 2007 - Tranche and truth)
             CDOs - combined mortages, and others
               then tranche'd, which leads to complex and opaque entities
                   these were given AAA (see below)

      sold to pension funds, foreign banks, etc.

~11:57 -- AIG (got special attention several times), used other derivative types
                         to insure these above, which amplified the risk
               the AAA?, partly through negotiation

            (essentially, junk offered) large basis for the crisis

     what is a crisis: some illiquid event, causes loss of faith, then panic (runs)

      2006, 2007 - mortgages started to fail, shifting the ground under the securities
             actually, not large losses (compared to movements on the stock market)
               but, no one knew was responsible for what
                        (too, leveraging brought into the securitization scheme)

        during the depression, 1000s of bank failures, small
          2008 Bear Stearns (mar), Lehman Brothers (sep), Merrill Lynch
              and mae and mac (propped up by Treasury)
                   AIG, Washington Mutual Bank, Wachovia (oct)

        for a depression, central bank needs to lend, also be accommodative

            2008 vigorous action by Fed, also G-7 (Oct 10)
                    shows interbank rates, went up (2007), then down (after Oct 10)
                       didn't trust each other 
                (hah! worse than the lemons problem -- "... the recent affair where the 
                       bankers (and other financial types) essentially froze their gaming 
                        as they knew that they were dealing mainly with crooks 
                            (like themselves) ...")
      Fed, discount window, longer terms, lower rate, auctions
               new programs, and collateral for loans

      enhance stability, allow availability (didn't work)

     emergency authority already in the law (13-3)
       banks, broker-dealers, paper borrowers, money market funds, asset-based securities
                     that last, consumer credit

        mmfs     buy shares, invest in short-term assets (commercial paper)
                     $1 share price
                 not insured         on demand, plus interest
           90 days, non-financial (payroll, inventories), financial (manage positions)
       lehman created a shock-wave, was into cps, plus mortgage, comm real est securities    
                                    lehman  both cre and mortgage hits
               withdrawals, ..., no new capital, so bankruptcy
                      even Fed tried to help

     mmfs failed their $1, hence redemptions (run or panic)

        Treasury, Fed provided backstop, ..., run ended in a few days

            about billion a day outflow

             mmfs started to drop cp which went into shock
                   cp rates went up    
              so Fed again     bolstered confidence
                   cp rate peaked, then recovered

              mar 08, bear stearns to jp morgan
                  oct 08, fed bailed out AIG
                       AIG said that they would insure what were bad securities
                            (no doubt, all sorts of bonuses for this crap)

               AIG did have collateral, 85 billion

                      Fed repaid, but Treasury own stock
                             distasteful, not to set a precedence

~12:34  too big to fail (will go into next time)
                trying to end this                      

    gdp down 5 percent     manu 30 down       homes 80 down
             serious collateral impact (yeah, savers sacked)

                      8 1/2 million out of work            global slowdown
                threat of a Great Depression

                 it was worse, the policy response seems to have worked

       indicators: stockmarket, 29, 07    truncated timeline, essentially
                         (yet, moral hazard still there - too, we have not
                                un-wound from the computational influences)

             15-16 months, stock price recovered, in U.S.
                       (so, what does this mean beyond aeration?)

           industrial production,        large v,  versus short, less deep v
                       (we'll id the slides when they're out)

~12:39       aftermath next, recovery, change, lessons

-- why the bad mortgages with high risk? --
      too much confident about prices going up
            1 year, then re-finance            
      demand for the securitized product
         ever-clever finance,  (he said that
             took the mix, then engineered AAAs (something from nothing)
               kept the bad pieces or sold
                of course, [would try to] sell them off [if there were a problem]
     it was profitable (short term, yeah bonuses)

-- volcker rule? --
       will talk about this next, reduce risk, prevent banks from doing
             proprietary trading -- legitimate exceptions (hedging, make markets)
               how to keep exceptions in control?
        liquidity - trading volumes  (he sees as important!)
               contagion - sell offs, lower price, puts pressure on those
                     who still hold

-- global collaboration, G-7, bail-out of AIG? --
            some inconsistencies, say Lehman UK and US,
              complexity is that something too big to fail might be international
                    how to help them fail safely?,
       said ad-hoc, no lead time was problematic
            cooperation between federal banks
               some use dollar funding
                  swapped dollars for euros (still in existence)
             coordinated cuts on same day in 08
      cooperation will be an on-going issue

-- off-balance sheet vehicles? --
       accounting rules, create vehicle, bank might own part,
           limited control, so separate organization, to get away with less
                 capital, ..., rules have been re-worked, need to be
            consolidated and put on the books

-- large firms, too big to fail -- how do you decide? --
             no doctrine, judgment on size, impact, etc.
            reform is to get rid of this     bad, unfair, etc.
        said they chose the least bad thing to do
       tried to be conservative
         AIG was obviously in need,
           Lehman was insolvent, couldn't borrow from the Fed
               was before TARP, there was no way to do the lone
         ad-hoc, again
            now, they'll have to assess how critical some bank is
                size, complexity, inter-connectedness, etc.
       on merger, will it create a more dangerous situation?
                numerical thresholds need to be determined
          if bad, no merger
     more focused on stability, group working on metrics, etc.

-- vulnerabilities, ratings, buyers would want better ratings,
             why these didn't come forth?  --
     you would think that it wouldn't be the seller who did the rating
             the buyer bears the risk,
         free rider problem, how to keep the work secret?
               better incentive for credit raters
                 investors would have to save the cost,
                      not want to give it away


12/13/2012 -- Don't know how long this page will be there, Daily Ticker. But, when I looked, 69% had said 'no' (hurt rather than helped) as to whether Ben has helped.

04/03/2012 -- Response 1.

03/28/2012 -- New page covering the series and its material.

03/28/2012 -- Distasteful? Many are saying that (Romney, et al). However, we could have NATIONALIZED the idiots. Perhaps, we ought to have (we would not have been any worse off). Of course, Ben's mind cannot grasp that notion. He says 'ever-clever' finance. Well, their antics hurt the rest. Why is that type of thing allowed? He says accounting is to blame. Who works to monitor/limit the 'smart' idiots and their tactics that lead to inevitable messes? How about having more mature approaches as the standard? Hey, Harvard!! You there? Oh wait, you left that realm in the mid-1800s, right?

03/28/2012 -- Added links. Will update when transcript and slides are available.

Ben needs to think about how he's sacked the savers (they are legion) over the past few years just so that he could get his pseudo-capital markets back up into an inflated mode (as if the ca-pital-sino, as evolved, is it for us). Ah, big guy!

Too, he's looking only at junk via mortgage packaging. Big guy, there were other types, and you know it. Plus, leveraged buyouts have been part of the scene for a long while. In many case, wrecking havoc, in the small, that is much worse than this slowdown which came from silly games.

Modified: 12/13/2012

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