Dodd-Frank

[Pheidippides]

I have spent the last few days learning about this law.

Everybody who voted for it needs a good sound asswhipping. Some of the stuff is okay. Some of it is asinine in the extreme.

[statman]

Please expound on the asininity...

[il Padrino Ute]

Please expound on the asininity...

Dodd-Frank

There it is.

[landpoke]

I have spent the last few days learning about this law.

Everybody who voted for it needs a good sound asswhipping. Some of the stuff is okay. Some of it is asinine in the extreme.

So you're in favor of blood diamonds from the Congo?

[Pheidippides]

Please expound on the asininity...

Some of the financial regulation isn't too bad. Require scrutiny of the too big to fail group is fine, although i am interested to see the definitions in the regs. They went overboard in the derivates clearinghouse regs too (cowboy has more to say on that), but the concept is okay. I have two huge issues with it above all others: proxy access, which sounds nice but really allows unions to have a larger say in companies, and the energy reporting stuff, which could force all US companies to show their books, marketing, bottom line, cost structure, etc to the world when they are dealing internationally. This would put them at a huge disadvantage vis a vis foreign companies, who will not have that obligation. Much will depend on the regs but it looks like a bunch of idiots threw everything and the kitchen sink in here. Ire is on both sides of the political spectrum over some of this, lest you think only conservatives are angry.

[statman]

Some of the financial regulation isn't too bad. Require scrutiny of the too big to fail group is fine, although i am interested to see the definitions in the regs. They went overboard in the derivates clearinghouse regs too (cowboy has more to say on that), but the concept is okay. I have two huge issues with it above all others: proxy access, which sounds nice but really allows unions to have a larger say in companies, and the energy reporting stuff, which could force all US companies to show their books, marketing, bottom line, cost structure, etc to the world when they are dealing internationally. This would put them at a huge disadvantage vis a vis foreign companies, who will not have that obligation. Much will depend on the regs but it looks like a bunch of idiots threw everything and the kitchen sink in here. Ire is on both sides of the political spectrum over some of this, lest you think only conservatives are angry.

I often hear the argumnet that without derivatives, the meltdown wouldn't have happened. It's sort of true, but it's really just complete deflection.

Derivatives were mostly a self-regulated market - those who wanted to trade, did so, taking into consideration the reputation and financial health of their trading partner. I simply don't buy that there were ANY players on either side of major derivatives contracts that didn't know what they were doing. They all claim they were duped after the fact, and the official US Government response supports that there were a bunch of dupes. But the reality is that they all went into things with their eyes wide-open.

What the SEC and Treasury and Congress don't want the general public to really understand is that it was the US Government that directly caused both players on the sides of these derivative contracts to suspend reality (for a variety of reason) and convince themselves that the contracts were safe. When the government gives messages that say that players are too big to fail or that the government is prepaired to prop-up any and all mortgages that Fannie/Freddie said were "conforming" - people/companies do stupid things...

I'd really rather have the derivatives market set up as it was prior to the crash, but that's a pipe-dream. It was a cheap way to raise money, and those low-costs were largely passed on all the way to consumers. But to be able to go back to the old way, we'd need guarantees that the government is going to stop sending signals that create imbalances in markets. The damage such signals can do in unregulated markets, based on trust, and with everyone playing on information, can be catestrophic.

To put it simply, there's nothing in hell the US government is going to be able to do to kill the derivatives markets. If they regulate them to death on Wall Street, they'll simply move to Tokyo or Hong Kong or Singapore or Bahrain. It's going to be a lot better for the US if they can make moderate changes and still keep the markets here. We'd be a lot better than simply losing all control of the markets - and losing all the jobs that go with them. And as I understand the new law, the one and only one thing everyone is sure of is that it's going to push a lot of the derivatives market overseas...

[Moliere]

I often hear the argumnet that without derivatives, the meltdown wouldn't have happened. It's sort of true, but it's really just complete deflection.

Derivatives were mostly a self-regulated market - those who wanted to trade, did so, taking into consideration the reputation and financial health of their trading partner. I simply don't buy that there were ANY players on either side of major derivatives contracts that didn't know what they were doing. They all claim they were duped after the fact, and the official US Government response supports that there were a bunch of dupes. But the reality is that they all went into things with their eyes wide-open.

What the SEC and Treasury and Congress don't want the general public to really understand is that it was the US Government that directly caused both players on the sides of these derivative contracts to suspend reality (for a variety of reason) and convince themselves that the contracts were safe. When the government gives messages that say that players are too big to fail or that the government is prepaired to prop-up any and all mortgages that Fannie/Freddie said were "conforming" - people/companies do stupid things...

I'd really rather have the derivatives market set up as it was prior to the crash, but that's a pipe-dream. It was a cheap way to raise money, and those low-costs were largely passed on all the way to consumers. But to be able to go back to the old way, we'd need guarantees that the government is going to stop sending signals that create imbalances in markets. The damage such signals can do in unregulated markets, based on trust, and with everyone playing on information, can be catestrophic.

To put it simply, there's nothing in hell the US government is going to be able to do to kill the derivatives markets. If they regulate them to death on Wall Street, they'll simply move to Tokyo or Hong Kong or Singapore or Bahrain. It's going to be a lot better for the US if they can make moderate changes and still keep the markets here. We'd be a lot better than simply losing all control of the markets - and losing all the jobs that go with them. And as I understand the new law, the one and only one thing everyone is sure of is that it's going to push a lot of the derivatives market overseas...

I'm no expert, but I do deal with derivatives, although not many financial derivatives. Mostly commodities.

Derivatives are given a bad name in part because of something the Oracle of Omaha said a coupel years back. He's known for his bold annual reports and I remember him calling derivatives "evil" or something like that.

With a derivative, there are two sides. Usually one side is hedging a risk and the other side is speculating. The speculating side is usually the bank, but they are experts in these things and structure a lot of them so they can also set up portfolios of these things and make some money on price movements, but mostly they are charging margin (or a fee) to setup the contract.

Tons of companies use derivatives to reduce risk. Your gas utility most likely enters into forward purchases of natural gas to guard against price movements. Banks enter into credit default swaps to guard against defaults on loans. A company may enter into an interest rate swap to convert variable rate debt to a fixed rate. In all these cases the company just wants to minimize risk, which is similar to saying that they want to be able to budget accurately into the future. Utilities are in the business of distributing gas, not in speculating on price movements.

Some people complain that moving all derivatives to exchanges will make them too uniform, meaning that companies can't just negotiate with the bank on the notional, price, and other terms. The funny thing is that rarely does someone get a perfect hedge even off the current exchange. Most banks will only setup gas contracts based on NYMEX or Henry Hub prices, but the actual receipt/delivery point will be somewhere down the pipeline where the price is a bit different (this difference is called a basis differential).

While there might be some derivatives that just won't work on an exchange (maybe weather hedges?) I'm not opposed to putting all derivatives on exchanges just because it provides more visibility and better pricing. Credit risk is easier to determine, a derivatives value is practically always known, and collateral is standardized and visible.

[Uncle Ted]

Dodd-Frank

There it is.

Oh, come on, when has Barney Frank ever been wrong? For example, the housing bubble...

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He clarified what he was really saying after the bubble...

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[il Padrino Ute]

Oh, come on, when has Barney Frank ever been wrong? For example, the housing bubble...

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He clarified what he was really saying after the bubble...

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Ooops. My bad.

[I.J. Reilly]

What the SEC and Treasury and Congress don't want the general public to really understand is that it was the US Government that directly caused both players on the sides of these derivative contracts to suspend reality (for a variety of reason) and convince themselves that the contracts were safe. When the government gives messages that say that players are too big to fail or that the government is prepaired to prop-up any and all mortgages that Fannie/Freddie said were "conforming" - people/companies do stupid things...

I'd be interested in what messages you saw pre-2007 that were a signal to companies that there were entities that the government saw as too-big-to-fail. Did they signal exactly who those companies were with enough certitude that corporations were willing to risk their entire businesses on this wink and nod agreement?

Utilities are in the business of distributing gas, not in speculating on price movements.

Did you learn that at Enron?

[Moliere]

Did you learn that at Enron?

You do know that a corporation can hold more than one business right?

[statman]

I'd be interested in what messages you saw pre-2007 that were a signal to companies that there were entities that the government saw as too-big-to-fail. Did they signal exactly who those companies were with enough certitude that corporations were willing to risk their entire businesses on this wink and nod agreement?



Did you learn that at Enron?

Ummm - no - I just paid attention to Fannie & Freddie's actions.


Banks and mortgage companies as a whole don't like to sit on mortgages - they like to originate them, get the fees, and sell the receivables ASAP. By far, the biggest buyer is Fannie/Freddie. By lowering standards for being classified as "conforming" Fannie/Freddie was giving huge incentives to the market to sell crap mortgages, and sell the receivables to Fannie/Freddie.


F&F would take those receivables, bundle many of them up into Mortgage Backed Securities, and sell those off. When companies bought the bundles of conforming loans from F&F, they did so with the implicit understanding that F&F were guaranteeing (sometimes with the aid of mortgage insurance) the value of the primary mortgages. When the definition of "conforming" changed, the market still assumed F&F were standing behind the values of the mortgages. The MBSs really were risk free because 1) historically there had never been significant losses in them, and 2) if all else fails, F&F stand behind everything they buy as "conforming."

Oops...

Although the reality of the stuation is that F&F ARE standing behind most of what they bought. They just didn't pay-out as quickly as people would have liked, and the second and third level of derivatives that were being sold from primary MBSs made everything more volatile and confusing.

But ultimatley, it looks like the US taxpayer is on the hook for an aditional $500 billion in mortgage losses from F&F...

[Moliere]

JP Morgan looking to reclaim bonuses that were paid out to employees of the investment arm of the company.

[Green Monstah]

I haven't looked at the regs, but when it was passed I helped draft a few articles on it. The clearing/margin requirements for major swap participants could be disastrous for small/medium E&P companies because it potentially ties up too much of their collateral and signficantly increases the cost of hedging against commodity price risk. It all depends on how the definitions shake out in the regs, but even still, to be exempt, energy companies have to lift their skirts to the CFTC, which is just inefficient, and apotential disadvantage to the companies. #Politicianssuck

[Moliere]

I haven't looked at the regs, but when it was passed I helped draft a few articles on it. The clearing/margin requirements for major swap participants could be disastrous for small/medium E&P companies because it potentially ties up too much of their collateral and signficantly increases the cost of hedging against commodity price risk. It all depends on how the definitions shake out in the regs, but even still, to be exempt, energy companies have to lift their skirts to the CFTC, which is just inefficient, and apotential disadvantage to the companies. #Politicianssuck

Looks like they might have caught a break....

According to the EEI, the final swap definition "correctly recognizes that many utility transactions should not be considered swaps," which would have subjected these deals to heavy CFTC regulation and oversight, including reporting and clearing requirements that require the posting of collateral. Utilities typically engage in OTC bilateral transactions with other utilities and in transactions within the financial markets in order to lock in a guaranteed price for commodities such as electricity, natural gas and coal for future delivery, the group highlighted.*

*the article i pulled that from is subscription only so I can post a link but here's a link to the CFTC fact sheet