CapitalistMarks

trust wallstreet?

Posted on 22. Apr, 2010 by scott in economic daydreaming, markets

Today Obama spoke quite eloquently (he nearly always does — so be careful and think about what he says) about the need to reform and regulate Wall Street.

I liked what he had to say and heard a few Wall Street regulars on the preceding talk shows also agree.  But is that enough?

Bottom line?

We can’t trust the folks on Wall Street (the investment capital of Earth) any more than we can throw them . . .  and some of those dudes are very rich and very heavy types.  Why should we expect?  Wall Street is the most sublime exhibit for Capitalism at work.

If there are no rules to follow you can (and they do) just about   anything to make money.

The key problem has been the use of scary, misunderstood, largely unregulated derivatives.

No one, including the salesmen who pumped them, understood entirely what derivatives were all about, except that they were a grand scheme to make a lot of money at the expense of naive investors.

These things (derivatives) are fancifully names financial instruments like CDS’s (credit default swaps) which are kinda like insurance for debt (you pay a fee or premium to a big financial institution to guarantee you will get paid the debt you owe and if there is a default the company — like AIG — will pay the debt).  This can also include sovereign debt (countries debt).

Then there are CDO’s or consolidated debt obligations.  These are a bit simpler but just as deadly.  A bunch (in the hundreds of millions of $$ and more) of mortgages are bundled together and sold.  And the seller does the bundling. Since there are hundreds or thousands of mortgages the seller sort of takes the ‘bundled’ debt on a leap of faith.  This is what Goldman Sucks Sachs is being sued by the SEC for and that has been in the news all week.

Problem is CDS’s and CDO and the like  are no small financial ‘instruments’, they can represent hundreds of billions of $$ and if there are a bunch of defaults all at once then there isn’t enought money to pay the debt.  Then  companies — Like AIG — reneg on the debt.  Whabang!  All of a sudden (like in 2008) companies fail (unless they are ‘too big to fail’ and the government steps in and guarantees them with taxpayer $$) and there is a terrible financial crises followed by a recession.

All of this fancy financial dealing is further endangered (to you and I particularly) because there is no regulation, no markets to trade them in so that they are monitored, and no rules to manage them.

This is a very bad place to be . . . one that in fact exacerbated an already scary recession.  And, it can’t be allowed to happen again.

What to do?

Write some regulations that will manage this threat and stop the secrecy perpetrated by large financial institutions, like JPMORGAN, MORGAN STANLEY, AIG, CITI BANK, BANK OF AMERICA and others.

I hope this brief lesson clarified the problem.

It was, and continues to be a big one.

Since I endeavor to make these posts short and to the point, and have failed miserably at this in the past, I am going to stop now and let you mull this over.

Ohh, the suspense!

Remember, as it stands now, we CAN”T trust Wall Street.  Investors lack confidence and with good reason.

Our definitively leftward-leaning President proposed today what he wants to do.

My next post will consider his proposal, and evaluate my estimate of its effective handling of such problems in the future.

I hope you are on the edge of your seats by now.

Tune in Tomorrow, or soon, for the conclusion:  Obama Takes on Wall Street.

thanks to flickr’s rosino for the photo

Tags: derivatives, investors confidence, obama takes on wall street, too big to fail, wall street, wall street reform