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(Bloomberg)   Cool: Former Citibank employee blows the whistle on bad mortgages, gets $31 million for her efforts. Sad: She says the case did nothing to fix the situation   (bloomberg.com) divider line 11
    More: Hero, Citigroup, Federal Housing Administration, Neil Barofsky, O'Fallon, berg Markets, about:blank  
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4199 clicks; posted to Business » on 19 Jun 2012 at 2:46 PM (2 years ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



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2012-06-20 01:21:34 PM
3 votes:

DirkValentine: Which brings up another point I have failed to grasp during this whole debacle - insurance on investments...is that like homeowners insurance but for bankruptcy?


Not bankruptcy, per se. If I was to make a laughably deceptive sales pitch to you, it's to hedge against losses of your own bets, which aids small businesses. For example, say you're interested in investing in a small start-up, but the odds of this business going under (based on raw history) is 80%. Most people wouldn't touch that. But if you bought insurance against the loss, then the start-up can get its capital infusion and you can minimize your losses if it goes under. Your big money bets ON the start-up, but you also "hedge" against it. The bank makes money by assessing the odds and pricing the insurance accordingly -- actuarial math 101. Over time, as businesses succeed or fail, they should make a decent profit. You're protected, start-ups get their capital, bank makes money, everyone's happy.

OK, you can stop laughing now. There's nothing inherently wrong with them, mind you. It comes down to who's selling what. The original purpose (derivatives) wasn't to prevent against losses, but for price stability. For example, if you're a shipping company, you need fuel. If you don't know how much fuel is going to cost 1, 6, 12 months from now, it makes it impossible to budget and if (like most competitive industries) you rely on short-term credit and/or slim profit margins, a single price shock can drive you out of business. So you buy a contract to buy oil at a fixed price. If the price of oil skyrockets, you save a TON of money. But if it collapses, the derivatives guy makes a TON of money. The guy who sells it to you is basically betting against you, but this isn't a zero-sum game. The "win-win" here is that you're willing to take a calculated loss in exchange for instability, because the guy (not being a charity) will price the derivative based on calculations and estimates that you'll slightly overpay for the oil. Ideally both sides understand the risks. . . IF it was a perfect world.

The real world, of course, is not perfect. Note the honest derivative assumes the guy selling the contract has neither the means nor inclination to manipulate the price of oil directly. So what if the "guy" selling the derivative is a gigantic multinational bank with trillions of dollars in assets that can not only sell derivatives, but also buy oil futures and price out competition? Now it's like trying to stop a hitman by hiring him as a bodyguard. The guy can assess how much the bodyguard contract is worth vs. the hitman contract, play up fears on both sides and at the end of the day whether you live or die depends letting yourself get screwed more than the person who wants you dead. He can't lose, and you're screwed either way.

Same with the bank. The banks do buy and sell insurance against investments; but it's more accurate to say they sell bets that their investments will fail -- to other investors. This is sort of like insurance IF you buy the investment AND the bet, but only if you assume they're honest. In reality, it's a scam because they can control their own risks. Take the CDS. The terms "buyer" and "seller" get mixed up often because people have little idea of who's buying and selling -- because no real product or service changes hands. It's basically a bet between an optimist and pessimist over a debt (CDSes are unregulated as shiat so you can make unlimited bets on a debt you're not even remotely involved in). The pessimist pays the optimist regular payments as long as the debt's good. If it defaults, the optimist has to pay the pessimist a big sum of money. One key here is that the unregulated nature means you can be an optimist AND pessimist, many times over, and whether you make money depends on how much of either side you buy/sell. In the Goldman Sachs - AIG fiasco, AIG was the optimist. Here's the thing, though -- GS was also buying a crapton of bad mortgages and selling them as financial instruments -- mortgage-backed securities. They don't make much money if the mortgage stays good or prices stay flat because they've already cashed out. They HAVE, however, shed themselves of the risk if the mortgage goes bad. If the real estate market were to collapse, well. . . they don't have to eat any bad mortgages, they've made their money up front AND AIG owes them a pile of money. So to make the most money, these loans had to be as crappy as possible -- so crappy that a real estate bust HAD to happen.

Basically, GS was selling a product that isn't insurance against its investments, it's selling you a bet that pays you to insure GS against its own failures. You can see how there's a massive, MASSIVE conflict of interest here. The only way they were innocent of fraud is if the guys buying these UBER-crappy mortgages had NO idea their employer was betting against them. Does anyone seriously believe that? Anyway, the two keys here are that they HAD to sell both the crappy MBSes AND the CDSes for this scheme to work, and that to sell this insanely WTF product, they HAD to get them rated AAA (as safe as U.S. Treasuries). . . which turned out to be just a simple matter of bribing the ratings agencies. Then institutional funds (pension funds, endowments, insurance companies like AIG, etc.) with a crapton of money, a requirement to buy AAA investments and serious pressure to increase returns from their perilously underfunded accounts could buy these mysterious little presents (MBSes that drove the bubble and CDSes that bet it would burst) that offered healthy returns. It's both brilliantly clever and easily a 10/10 on the unethical scale. Would you accept an offer to provide fire insurance to an arsonist??

It's easy to get bogged down in these details, but here's a final thought: Giving the banks every last benefit of the doubt that they didn't deliberately deceive investors and just made smarter bets. . . Can you see at any point how this results in "efficient allocation of capital", which is the de facto stated mission of Wall Street (as it's essentially the phrase they resort to when defending their existence)? Because I sure as hell don't. Bear in mind a lot of these investment products they were selling up to the crash was based on residential real estate. These types of transactions did NOT get factories up and running except by the most indirect means; they had their hands buried in properties and commodities that consumers needed on a daily basis. When you follow the money to the source (selling bets to both sides on everyday consumer needs like land and oil), this was nothing other than a gigantic machine to siphon wealth from the working class.
2012-06-19 11:42:32 AM
2 votes:
The most interesting part of the article?

President Barack Obama invoked the JPMorgan loss as more evidence of the need for tighter regulation of Wall Street. Mitt Romney, the presumptive Republican presidential nominee, has meanwhile continued to call for the repeal of Dodd-Frank, the law Sherry Hunt followed when she blew the whistle on her employer.


Wow, Romney really DOES care about the little people.
2012-06-21 12:40:03 AM
1 votes:

MugzyBrown: Citigroup behaving badly as late as 2012 shows how a big bank hasn't yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

"This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth," he says.

Hey idiot. They didn't learn BECAUSE they were bailed out. Why would they learn from being bailed out?

This is exactly the reason they shouldn't have been bailed out. The firm should have gone under and the execs and board sued into bankruptcy by the employees, shareholders, and debt holders.


I definitely agree with this. The whole "too big to fail" notion strikes me as being not wholly dissimilar to "monopoly" -- not in the sense of cornering a market, but in the sense that "too big to fail" implies "owns or controls too much of a market for that market to reasonably endure its sudden failure." Which, as far as I'm concerned, amounts to a degree of ownership or control that calls for the same remedies.

Assuming regulators or Congress really can rationally determine at what point a given firm is "too big to fail" at the time of its imminent collapse, I'd think they should be able to do the same at any point along its history and growth: in other words, they should be able to tell well ahead of any trouble if such trouble would be really serious trouble for the market sector in question -- if that firm is "too big to fail." If it is, then invoke monopoly rules and order it to divest enough holdings to bring back under that margin (under threat of forced divestiture, naturally, if necessary in the form of a regulated breakup).

I think at this point we can presume that "too big to fail" is rationally "too big."
2012-06-20 07:54:43 PM
1 votes:

turtleking: still flaunting federal law in 2012...years after the bail out and no one has gone to prison yet?


That's what happens when you vote for Democrats or Republicans.
2012-06-20 10:38:16 AM
1 votes:

DirkValentine: I would have liked to seen a temporary nationalization of them, then broken into the appropriate pieces, then slowly eeked back into the private sector.


The FDIC already does that with consumer banks; it's called "receivership". While the bankruptcy is meandering through the courts with all these angry rich men squabbling to get their fat hands in the pot of money, the government runs the bank so there's no impact to consumers. When it's all sorted out, the FDIC hands ownership back to the private sector. Now, that's a deliberate oversimplification so I'm sure some asshole is gonna nit-pick that, but long story short, the government getting heavily involved with a troubled bank is nothing new. . . as long as it's a small, private bank.

Investment banks are different, of course. We have to throw money at them with no strings attached. And if the public is so angry that we can't give them no-interest loans in broad daylight, we'll take over their biggest debtor (AIG) and funnel piles of money through that to meet their CDS obligations dollar for dollar.

Again, think of why the government took such an insanely indirect route. Instead of taking the investment banks into receivership, they let Goldman Sachs' biggest competitor go under, then took over an insurance company that owed GS a shiat-ton of money, then paid back those financial obligations dollar for dollar. As a means of stabilizing the financial markets it's terribly inefficient and wasteful. It's much better to just take AIG (if it was really that necessary) AND the investment banks into receivership and nullify all the transactions; the biggest reason to get the government involved is to re-negotiate bad contracts that have significant public impact. It is, however, a particularly slimy way of laundering unthinkably obscene piles of Treasury money to campaign contributors.
2012-06-20 10:20:50 AM
1 votes:
When the penalties for malfeasance and criminal actions are less than the profit to be made, the penalties are meaningless

/Ric Romero signing off!
2012-06-20 09:52:53 AM
1 votes:
So... who's in prison for this right now? Clearly people were responsible for financal fraud here. Widespread even. And there's a whistleblower.

So why isn't anyone in jail?
2012-06-19 06:02:31 PM
1 votes:

MugzyBrown: Citigroup behaving badly as late as 2012 shows how a big bank hasn't yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

"This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth," he says.

Hey idiot. They didn't learn BECAUSE they were bailed out. Why would they learn from being bailed out?

This is exactly the reason they shouldn't have been bailed out. The firm should have gone under and the execs and board sued into bankruptcy by the employees, shareholders, and debt holders.


No, we absolutely needed to bail out those banks. And then we needed to chop them up into smaller banks that wouldn't need to be bailed out because they'd never be big enough to hold the world's economy hostage again.
2012-06-19 05:10:11 PM
1 votes:
still flaunting federal law in 2012...years after the bail out and no one has gone to prison yet?
2012-06-19 03:14:49 PM
1 votes:

Cythraul: Learn? From our mistakes? Don't be ridiculous.


No one said anything about it being a mistake.
2012-06-19 03:13:12 PM
1 votes:
Citigroup behaving badly as late as 2012 shows how a big bank hasn't yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

"This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth," he says.

Hey idiot. They didn't learn BECAUSE they were bailed out. Why would they learn from being bailed out?

This is exactly the reason they shouldn't have been bailed out. The firm should have gone under and the execs and board sued into bankruptcy by the employees, shareholders, and debt holders.
 
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