Michael Osinski - How One Man Broke the US Economy

[GG]

umm

 

yes you did say that AIG had nothing to do with insuring those derivatives. Here's what you wrote : I doubt that Magox understands what the article means either, because it has nothing to do with AIG insuring a massive amount of the CDO's, SIV's and MBS's.

 

The reading comprehension suggestion never gets old. Read what I wrote again. Then read it again.

 

So your assumption that I am a part of all this is exactly that, just an assumption.

 

Frankly, I didn't assume anything of the sort, nor even hinted at it. But feel free to make up other stuff as you don't answer my questions.

 

 

My guess is that you are a leftist apologist. By the tone of your argument, which are backed up by nothing btw, you seem to take a offense that the repeal of GS is the democrats fault. I wasn't trying to make this a political conversation, but my guess is that this is the root of your ignorance on this topic. You automatically are defending the Clinton administration by insinuating that the repeal of GS was not the root cause. I may be wrong about your political agenda, but I am just going on a hunch based on your tone.

 

I am only pointing out facts. The repeal did happen under Clinton's watch, Greenspan did push for it, and the Bush administration pushed for deregulation of the markets. Paulson was appointed during Bush's watch, and Paulson was a very smart Wall Street man, who's economic model was broken, therefore making him blind to the risks of the non regulated MBS markets.

 

There are many people to blame. My argument is that the repeal of the GS act made things 100 times worse then what they were.

 

There are so many contradictions in the above, that I don't even know where to start. You do realize that the criticism of repealing GS is from the left as they say the law was a great one and Clinton was forced into it. So how can I be a leftist apologist if I'm saying that the law was a piece of toothless garbage?

 

Maybe New York Times ran a story on it? Link?

[bills_fan]

My argument is that the repeal of the GS act made things 100 times worse then what they were.

 

No, no it did not. Gramm-Leach Bliley Act, which repealed Glass Stegal, basically codified existing court decisions relating to the breaking down of barriers between commercial and investment banks. Essentially, since Glass Stegal was passed, the commercial banks had been chipping away at it via the courts to try and get access to the more profitable investment banking activities (which they assumed they could do better, due to their larger balance sheets). So, at the time the Gramm-Leach Bliley Act was passed there was precious little new activities that banks (commercial or investment) could do. The biggest changes in that law related to merchant banking, not separation of commercial and investment banking (which had largely been done away with via 70 years of court decisions).

[Magox]

The reading comprehension suggestion never gets old. Read what I wrote again. Then read it again.

 

 

 

Frankly, I didn't assume anything of the sort, nor even hinted at it. But feel free to make up other stuff as you don't answer my questions.

 

 

 

 

There are so many contradictions in the above, that I don't even know where to start. You do realize that the criticism of repealing GS is from the left as they say the law was a great one and Clinton was forced into it. So how can I be a leftist apologist if I'm saying that the law was a piece of toothless garbage?

 

Maybe New York Times ran a story on it? Link?

You still havn't said one thing that has any sort of substance what so ever.

[GG]

You still havn't said one thing that has any sort of substance what so ever.

 

I don't need to. I'm just asking questions. When you provide a cogent answer, then I will respond in kind.

 

Perhaps you would like to address the rebuttal offered by bills_fan above. Note he offered something of substance without resorting to a newspaper article as the primary source, which indicates he may know what he's talking about.

[Magox]

I don't need to. I'm just asking questions. When you provide a cogent answer, then I will respond in kind.

 

Perhaps you would like to address the rebuttal offered by bills_fan above. Note he offered something of substance without resorting to a newspaper article as the primary source, which indicates he may know what he's talking about.

I suggest you read my first few posts regarding this matter, since none of those had any newspaper article references.

 

In response to what Bills fan had to offer, it is very simple. Phil Gramm and Jim Leach were notorious for pushing more deregulation of the financial markets, they are "free market" politicians.That is why they pushed for the repeal of Glass-Steagall. Come on now GG, any one who keeps up with politics and the markets know that. That's a republican mantra, "free markets". Was that simple enough for you?

[GG]

I suggest you read my first few posts regarding this matter, since none of those had any newspaper article references.

 

In response to what Bills fan had to offer, it is very simple. Phil Gramm and Jim Leach were notorious for pushing more deregulation of the financial markets, they are "free market" politicians.That is why they pushed for the repeal of Glass-Steagall. Come on now GG, any one who keeps up with politics and the markets know that. That's a republican mantra, "free markets". Was that simple enough for you?

 

And there you go again. You've had several people in this thread dispute the role that GS played in the collapse. You've been presented with legal evidence of the law's ineffectiveness. You've been asked questions to back your positions, to which you linked irrelevant WSJ articles.

 

So, your final answer is that it is all politicians fault for not protecting the financial system? And I'm the apologist?

 

I have no clue what you do in "financial services." But your responses hint very strongly that you don't understand how your field works. Just because you work in a deli doesn't mean you understand how sausages are made.

[DC Tom]

In response to what Bills fan had to offer, it is very simple. Phil Gramm and Jim Leach were notorious for pushing more deregulation of the financial markets, they are "free market" politicians.That is why they pushed for the repeal of Glass-Steagall. Come on now GG, any one who keeps up with politics and the markets know that. That's a republican mantra, "free markets". Was that simple enough for you?

 

Let me rehash this point of argument in terms that you might understand:

 

You: "Glass-Steagall made things 100x worse".

bills_fan: "No, it didn't."

You: "Gramm and Leach are free-market Republicans. So there! "

 

 

That seems like a coherent argument to you?

[Magox]

And there you go again. You've had several people in this thread dispute the role that GS played in the collapse. You've been presented with legal evidence of the law's ineffectiveness. You've been asked questions to back your positions, to which you linked irrelevant WSJ articles.

 

So, your final answer is that it is all politicians fault for not protecting the financial system? And I'm the apologist?

 

I have no clue what you do in "financial services." But your responses hint very strongly that you don't understand how your field works. Just because you work in a deli doesn't mean you understand how sausages are made.

You and DC Tom have selective memory.

 

I gave you the answer in details in a prior post. Now, I know you guys have a tough time comprehending information or retaining it, one of the two. So, I will repost a post of mine that answered that same rebuttal by Bills Fan.

 

 

here goes, specially for you and DC Tom:

 

Remember, the whole point of GS was to stop a future occurence of a deflationary episode and to make sure that there is enough government oversight and regulation to try to prevent these situations from occuring again.

 

The reason why they repealed the GS act was that huge depository institutions such as commercial banks like Citigroup for instance, would now be able to operate in “deregulated” financial markets. . They were losing market shares to other securities firms that were not so strictly regulated, it caused these huge commercial banks and depository institutions to compete, and when they compete and fight for profits including foreign companies, which you aluded to earlier, then risk management becomes a secondary concern. Remember, foreign companies didn't have to abide by the GS act, so it created unfair competitive advantages to foreign depository institutions, which pressured the repeal of the act.

 

Secondly, it was a form of diversification. The thinking behind it was that they believed that securities activities that these depository institutions were seeking were supposdedly both low-risk, and would reduce the total risk of organizations offering them. (boy were they wrong on that one)

 

Of course, there was a lack of risk management and the pitfalls of the GS act were tremendous. These depository institutions possessed enormous financial power, let's remember they are controlling other people's money, so they must ensure soundness and competition in the market for funds, whether it be through loans, deposits or investments. They failed miserably in this area. Securities activities are very risky, which can lead to enormous losses. These possible losses could threaten investors deposits and investments. In turn, the Government insures deposits through the FDIC and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

 

Let's not forget that Depository institutions are supposed to be able to manage risk. It's people's deposits for crying out loud. When these institutions enter unregulated markets, and they are competing for profits against other smaller and less responsable institutions in a more speculative securities businesses, which btw, many of these institutions were not equipped properly for this, then the pitfalls can be disastrous.

 

Shortly after the repeal of the GS act, huge depository institutions entered some of the unregulated Over the Counter MBA, SIV and CDO markets.

 

What you are failing to understand, is that when these huge banks, with these massive amount of funds, like Citigroup for example, when they enter some of the unregulated markets, the amount of liquidity that is provided for subprime mortgages just to give an example, it fuels the fire of over speculation.

 

Think about it for a second. Wall Street is greedy by nature. The name of the game is to make as much money and as quickly as possible. Once you allow depository institutions to enter a game of profits through an unregulated market, Sh*t is going to happen. Every time!! It's just a matter of time before it will happen.

 

That answers Bills Fan Rebuttal.

 

Btw, GG, Last I remember you had a few people criticize you on this thread for offering nothing to the discussion.

 

DC Tom, please

 

Did you just write:

 

Let me rehash this point of argument in terms that you might understand:

 

You: "Glass-Steagall made things 100x worse".

bills_fan: "No, it didn't."

 

You: "Gramm and Leach are free-market Republicans. So there! "

 

 

That seems like a coherent argument to you?

 

Does, "No, it didn't" sound like a coherent argument?

 

 

It doesn't matter, you guys will see what you want to see. I've proven you wrong GG, regarding the AIG argument. That is a fact, there is no disputing it. The only rebuttal you offer is that I have to bring up a news paper article after the fact. HUH

 

you're too much. Stay blind, after all, ignorance is bliss.

 

In regards to the repeal of GS, that is debatable. But since you and DC Tom have very limited knowledge regarding this topic, it is tough to debate it with you guys.

[GG]

In regards to the repeal of GS, that is debatable. But since you and DC Tom have very limited knowledge regarding this topic, it is tough to debate it with you guys.

 

The repeal of GS did not change the regulatory supervision of commercial banks' capital requirements. The repeal of GS did not change the mechanism of commercial banks' funding sources. The repeal of GS did not change the mechanism of commercial banks' risk management practices. All of the above contributed to the financial crisis.

 

So tell the uneducated, yet again, how the repeal of GS was 100 times more responsible for the crisis than anything else.

 

Do yourself a favor and read up on the Basel accords and educate yourself.

[bills_fan]

That answers Bills Fan Rebuttal.

 

Not really. See, instead of linking to a newspaper article, I will link you to the definitive legal treatise on this subject, "Securities Activities of Banks," by Melanie Fein (a book, BTW, I have on my shelf) and you can read about it yourself. GS was neutered primarily in the 1980s and early 1990s, when securities activities really took off.

 

Essentially, GS was created to make commercial banking a utility function, rather than a dynamic business. You've heard the phrase "banker's hours?" Well thats where it came from. Investment banking, on the other hand, was the dynamic, risk-taking business that drove so much innovation. Commercial bankers chipped away at the securities activities they could engage in for years, before finally winning the war in the 1990s, well before the relevant provisions of GS were repealed.

 

Happy reading.

 

Securities Activities of Banks

[Lurker]

The expansion of funding and liquidity for the subprime markets expanded at an enormous rate. Without the repeal of GS, funding for subprime mortgage lending would of been no where near as massive as it was.

I gotta agree with GG here. GS didn't create the worldwide savings glut or cause Greenspan to hold short-term rates down too long.

 

Subprime mortgage lending would have occurred with or without GS. The biggest drivers of the boom were investment banks, not commercial banks, as their clients had an insatiable appetite for higher-yielding AAA-rated securities. The fact these securities were based on dubious models and had underlying collateral of less than AAA-quality had nothing to do with GS, IMO...

[Magox]

The repeal of GS did not change the regulatory supervision of commercial banks' capital requirements. The repeal of GS did not change the mechanism of commercial banks' funding sources. The repeal of GS did not change the mechanism of commercial banks' risk management practices. All of the above contributed to the financial crisis.

 

So tell the uneducated, yet again, how the repeal of GS was 100 times more responsible for the crisis than anything else.

 

Do yourself a favor and read up on the Basel accords and educate yourself.

That's not the point. Everything seems to go right over your head.

 

So let me explain to you "the uneducated" what the repeal of GS did,

 

It did allow depository institutions and banks to enter the "deregulated" financial markets. That is a fact.

 

What it prevented the GS was that Securities activities that took place after the result became much more risky than prior to it, leading to enormous losses. These losses threatened the integrity of their customers deposits, which were backstoped by the FDIC, (which btw was originated from the Orignal GS act).

 

These same depository institutions are supposed to be managed to limit risk, which they didn't. The same risk management that was used prior to GS from these depository institutions were not conditioned to operate prudently in more speculative securities businesses.

 

You fail to realize that these Banks or depository institutions possess enormous financial power, why? because they control enormous amounts of other people’s money; the extent of their power must be limited to ensure proper risk management, soundness and competition in the market for funds, whether through loans or investments.

 

I've made my case, with factual data and an argument that makes a lot of sense. You on the other hand, have offered very little to the argument.

 

DC Tom, your sidekick has offered informative Gems such as :

 

Let me rehash this point of argument in terms that you might understand:

 

You: "Glass-Steagall made things 100x worse".

bills_fan: "No, it didn't."

You: "Gramm and Leach are free-market Republicans. So there! "

 

 

That seems like a coherent argument to you?

 

and:

 

He sure showed you

 

Good one's Tom

 

keep em coming.

 

We just keep going around in circles.

[GG]

Subprime mortgage lending would have occurred with or without GS. The biggest drivers of the boom were investment banks, not commercial banks, as their clients had an insatiable appetite for higher-yielding AAA-rated securities. The fact these securities were based on dubious models and had underlying collateral of less than AAA-quality had nothing to do with GS, IMO...

 

Which were all made possible by the rolling implementation of Basel's risk based capital standards, which rewarded financials for holding any AAA paper, which they further managed by buying CDS protection against defaults.

 

Great system in theory, but if a black swan event happens, look out.

[Magox]

I gotta agree with GG here. GS didn't create the worldwide savings glut or cause Greenspan to hold short-term rates down too long.

 

Subprime mortgage lending would have occurred with or without GS. The biggest drivers of the boom were investment banks, not commercial banks, as their clients had an insatiable appetite for higher-yielding AAA-rated securities. The fact these securities were based on dubious models and had underlying collateral of less than AAA-quality had nothing to do with GS, IMO...

GS did not cause Greenspan to hold short-term rates down too long, I agree with that completely. Which no doubt exasperated the situation. There are many factors that contributed to the mess that we are in today, which I posted earlier and gave 13 reasons to what I believe contributed to the situation. What I am saying is that the repeal of GS allowed depository institutions to enter into some of the "deregulated" financial markets. That is factual. A large portion of the funding for Subprime lending came through these same banks. Without the funding, there wouldn't of been no where near as much fuel to add on to the fire.

 

Lurker, The fact of the matter is, They did lose a lot of money through these "deregulated" financial instruments. They wouldn't of been able to enter these "investments" if it hadn't been for the repeal of GS. That's not speculation.

[GG]

GS did not cause Greenspan to hold short-term rates down too long, I agree with that completely. Which no doubt exasperated the situation. There are many factors that contributed to the mess that we are in today, which I posted earlier and gave 13 reasons to what I believe contributed to the situation. What I am saying is that the repeal of GS allowed depository institutions to enter into some of the "deregulated" financial markets. That is factual. A large portion of the funding for Subprime lending came through these same banks. Without the funding, there wouldn't of been no where near as much fuel to add on to the fire.

 

Lurker, The fact of the matter is, They did lose a lot of money through these "deregulated" financial instruments. They wouldn't of been able to enter these "investments" if it hadn't been for the repeal of GS. That's not speculation.

 

Now you have four people telling you you're wrong. Four people who I know understand the fundamentals. Four people who I know understand the topic more than a WSJ reporter. Yet, you still ling to the buzzwords to support your point. Banks were always able to play in some kind of deregulated markets, including the hundreds of OTC operations. Do you think that commercial banks' trading floors appeared out of thin air in 1997?

[Magox]

Now you have four people telling you you're wrong. Four people who I know understand the fundamentals. Four people who I know understand the topic more than a WSJ reporter. Yet, you still ling to the buzzwords to support your point. Banks were always able to play in some kind of deregulated markets, including the hundreds of OTC operations. Do you think that commercial banks' trading floors appeared out of thin air in 1997?

four people. That proves your point? Give me a break. The only two that have brought up valid arguments are Bills Fan and Lurker, which I've answered in detail both of their points through out the posts that I have provided. This is what a debate is about. I have brought you factual information regarding the risks that occured after the repeal of GS and that AIG has insured these "deregulated" financial instruments. I've proven you wrong regarding AIG. that is factual information.

 

In regards to the repeal of GS, being the largest contributer of the financial meltdown, that is debatable. But what is not debatable, is that as a result of GS, these DEPOSITORY institutions, not just investment banks, entered into many of the "deregulated" financial markets. That is factual. What else is factual, is if they had not participated in these markets, these same DEPOSITORY institutions would of never of had to receive bailout funds. That is factual. The majority of the losses that they incurred GG, was not through losses of bad loan underwriting. It was through bundled MBS's. Another words derivatives that were tied to the subprime markets. That is a fact GG.

 

So, I don't care that if 4 people, 10 people or even 100 people disagree with my argument, because after all it is debatable, no one can rationally dispute the facts that I have provided.

 

Also did you just say that they understand more about this than a WSJ reporter.

 

You truly do lack reading comprehension. Their argument against mine is regarding the repeal of the GS act. Not what that article was about. Man, you really need to go back to school.

 

Go back and see what their dispute with me is about, and then go back and read that article.

 

Come on GG, you got to do better than that.

[Lurker]

A large portion of the funding for Subprime lending came through these same banks. Without the funding, there wouldn't of been no where near as much fuel to add on to the fire.

 

The 'fuel' was out there, irrespective of GS. Funding actually came through the asset-backed commercial paper market, not bank deposits or other balance sheet funding sources, which again gets back to the global savings glut looking for vehicles to put their money to work in.

 

Lurker, The fact of the matter is, They did lose a lot of money through these "deregulated" financial instruments. They wouldn't of been able to enter these "investments" if it hadn't been for the repeal of GS. That's not speculation.

The I-banks that lost money did so because they were holding large inventories of subprime mortgages in the process of being aggregated to create new MBS-securities when the music stopped. Without the ability to unload this sh-- on some other unsuspecting fool, they had to hang onto it and mark it down each quarter. Some, like ML, were even foolish enough to think it was a good investment. (GS on the other hand, made a killing shorting the stuff).

 

The biggest loss to commercial banks came from purchasing AAA-rated (but craptasticly bad) CDOs and RMBS (and coming soon, CMBS) for their investment portfolios. Anybody could buy this junk, from pension funds to foreign central banks, and they all have to account for its declining market value by again taking M-2-M hits.

 

How is that related to GS?

[Magox]

The 'fuel' was out there, irrespective of GS. Funding actually came through the asset-backed commercial paper market, not bank deposits or other balance sheet funding sources, which again gets back to the global savings glut looking for vehicles to put their money to work in.

 

 

The I-banks that lost money did so because they were holding large inventories of subprime mortgages in the process of being aggregated to create new MBS-securities when the music stopped. Without the ability to unload this sh-- on some other unsuspecting fool, they had to hang onto it and mark it down each quarter. Some, like ML, were ven foolish enough to think it was a good investment. (GS on the other hand, hade a killing shorting the stuff).

 

The biggest loss to commercial banks came from purchasing AAA-rated (but craptasticly bad) CDOs and RMBS (and coming soon, CMBS) for their investment portfolios. Anybody could buy this junk, from pension funds to foreign central banks, and they all have to account for its declining market value by again taking M-2-M hits.

 

How is that related to GS?

Lurker, there was fuel out there, I don't dispute that, but what I am saying is that the repeal of GS allowed more funding for subprime mortgages through channels such as Citigroup for example, that had not been permitted prior to the repeal of GS. Correct?

 

Regarding your second point. I respectfully disagree. Sure Goldman Sachs back in 2007 made over a Billion dollars shorting the subprime mortgage markets, but at the same time they were selling to their own clients these "deregulated" MBA's. That is factual Lurker, not speculation.

 

I respect your opinions, but you did say something that is not totally accurate. you said that Goldman made a killing shorting the stuff, actually they lost more buying these bonds than shorting it. Since GG doesn't believe in credible publications, you can find that through google. That is a fact.

 

regarding what you said here:

 

The biggest loss to commercial banks came from purchasing AAA-rated (but craptasticly bad) CDOs and RMBS (and coming soon, CMBS) for their investment portfolios. Anybody could buy this junk, from pension funds to foreign central banks, and they all have to account for its declining market value by again taking M-2-M hits.

 

that is absolutely true. Except one thing, Citigroup and Bank of America, which are depository institutions, that are two of the biggest banks in the world, entered into some of the unregulated CDO and MBS markets. These companies should of never of been able to have had the ability to do so. For god's sake, they hold people's deposits, these institutions should practice much better risk controls. Without the repeal of GS, they would of never had access to many of these markets.

 

correct?

 

You see ,this is a good debate. At least you bring up some eal factual information.

[Magox]

The 'fuel' was out there, irrespective of GS. Funding actually came through the asset-backed commercial paper market, not bank deposits or other balance sheet funding sources, which again gets back to the global savings glut looking for vehicles to put their money to work in.

 

 

The I-banks that lost money did so because they were holding large inventories of subprime mortgages in the process of being aggregated to create new MBS-securities when the music stopped. Without the ability to unload this sh-- on some other unsuspecting fool, they had to hang onto it and mark it down each quarter. Some, like ML, were even foolish enough to think it was a good investment. (GS on the other hand, made a killing shorting the stuff).

 

The biggest loss to commercial banks came from purchasing AAA-rated (but craptasticly bad) CDOs and RMBS (and coming soon, CMBS) for their investment portfolios. Anybody could buy this junk, from pension funds to foreign central banks, and they all have to account for its declining market value by again taking M-2-M hits.

 

How is that related to GS?

One more thing now that it popped in my mind.

 

The source of funding through these depository and investment banking institutions wasn't direct. What they did Lurker, is they securitized these mortgages many of which were deregulated MBS's, subprime mortgages, through bond offerings. As you mentioned, when the Crap hit the fan, the buyers of these toxic assets dried up. They were and still are left holding all this debt that no one wants. As you mentioned, they had to mark it down quarter by quarter, taking huge hits.

 

But my whole argument is that the repeal of GS allowed these financial institutions to the exposure of these "deregulated" markets.

 

Correct?

 

So, now they are stuck with this toxic paper that no one wants, and guess who's paying for it? The government, taxpayer.

[Lurker]

that is absolutely true. Except one thing, Citigroup and Bank of America, which are depository institutions, that are two of the biggest banks in the world, entered into some of the unregulated CDO and MBS markets. These companies should of never of been able to have had the ability to do so. For god's sake, they hold people's deposits, these institutions should practice much better risk controls. Without the repeal of GS, they would of never had access to many of these markets.

 

correct?

I agree to some extent. A 'benefit' of GS was supposed to be diversification and dispersion of risk, but in reality it allowed the 'casino' risk-taking mentality of Wall Street to blow back onto the health of the FDIC-insured commercial banking industry. The ability to set up FHC's ultimately increased risk to the banking system. OTOH, there are more than 700 FHCs but only a handful of bad actors caused the problem--is it the structure itself, or the hubris of a few that led to the meltdown?

 

Either way, the credit market meltdown would have occurred anyway, IMO, since the I-banks would have continued to shovel their sh-- out the door to unsuspecting investors looking for yield as long as there were folks willing to lend them ST money via the commercial paper market. Again, something GS didn't have an impact on...