# \#OccupyWallStreet **URL:** \ **Category:** The BBQ Pit\ **Created:** [September 19, 2011, 6:27pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851 "2011-09-19T18:27:54Z")\ **Posts on this page:** 20\ **Page:** 113
**Author:** ![Zeriel](https://avatars.discourse-cdn.com/v4/letter/z/58956e/32.png) [@Zeriel](https://boards.straightdope.com/u/Zeriel)\ **Post date:** [December 7, 2011, 4:24am UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2241 "2011-12-07T04:24:41Z")
As for the conflict of interest? If “loan demand is down”, as opposed to “fewer loans are being granted”, then they don’t have to get called on the carpet for excessive tightening of loan standards and can instead continue to invest my bailout funds in short-term securities gambling. It’s pretty complicated, though. Should I walk you through the rough parts? I mean, since you feel free to insult my intelligence but are apparently too stupid to work an iPad or whatever bullshit you’re blaming your fractured word choice on. ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [December 7, 2011, 2:03pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2242 "2011-12-07T14:03:15Z")
> [@](#): > > Incidentally, [URL=“[Commodity Futures Contract: Definition, Example, and Trading](http://www.investopedia.com/terms/c/commodityfuturescontract.asp)”] > You’re hilarious when I trivially disprove you. Commodities futures specify a commodity to be delivered, imagine that! You are such a dipshit. You really are fucking stupid. I gave you a specific example of a contract which is undeliverable. You respond with a general cite from investopedia of all things, saying you have to be careful with commodity contracts in general or you might end up taking delivery by accident. You think that disproves what I said? It’s not particularly accurate either. In practice it’s pretty difficult, if not impossible to accidentally end up with delivery. Cite for anybody it has happened to? ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [December 7, 2011, 2:19pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2243 "2011-12-07T14:19:20Z")
> [@Zeriel](#): > > As for the conflict of interest? If “loan demand is down”, as opposed to “fewer loans are being granted”, then they don’t have to get called on the carpet for excessive tightening of loan standards and can instead continue to invest my bailout funds in short-term securities gambling. > > It’s pretty complicated, though. Should I walk you through the rough parts? I mean, since you feel free to insult my intelligence but are apparently too stupid to work an iPad or whatever bullshit you’re blaming your fractured word choice on. Yes. You need to walk me through it. Who is going to call them on the carpet? Do you have an example of their ever having been retribution against a loan officer for filling out one of these surveys? You claim they have a “conflict of interest” because they can be “called to the carpet” and that this invalidates the survey. Cite me an example, please, because this is. Omplete bullshit. ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [December 7, 2011, 2:26pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2244 "2011-12-07T14:26:51Z")
Dont bother citing or responding. I’ve had enough. I’m outta here ---
**Author:** ![Zeriel](https://avatars.discourse-cdn.com/v4/letter/z/58956e/32.png) [@Zeriel](https://boards.straightdope.com/u/Zeriel)\ **Post date:** [December 7, 2011, 5:22pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2245 "2011-12-07T17:22:35Z")
The High Lord has exited! ---
**Author:** ![Zeriel](https://avatars.discourse-cdn.com/v4/letter/z/58956e/32.png) [@Zeriel](https://boards.straightdope.com/u/Zeriel)\ **Post date:** [December 7, 2011, 5:34pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2246 "2011-12-07T17:34:11Z")
In all seriousness, for people playing along at home, I did what’s called “providing a cite”. You’ve been repeatedly told that your “expertise” is unrecognized, and responded by throwing insults and mis-representing the cites you DID put out. I looked on the CME groups listing of products offered on the NYMEX market, incidentally. Saw about what I expected to see, and what I was complaining about in the first place–a bunch of financial transactions traded as though they were commodities, and which exist not for the purpose of moving commodities but for playing stupid speculative games with a market for things that actual people are trying to use to produce actual goods. A tail is not a leg, no matter what you call it. A financial gamble indexed to a commodity is not a commodity future, no matter what you call it. ---
**Author:** ![RTFirefly](https://avatars.discourse-cdn.com/v4/letter/r/c77e96/32.png) [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)\ **Post date:** [December 7, 2011, 5:38pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2247 "2011-12-07T17:38:38Z")
> [@Scylla](#): > > And I actually…tend to treat people with pretty much the respect they show me and the discussion. It sure seems like Scylla frequently runs out of people who show him proper respect. Can’t imagine why that is. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [December 7, 2011, 6:33pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2248 "2011-12-07T18:33:38Z")
Neither of them is a frequent contributor. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 7, 2011, 6:37pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2249 "2011-12-07T18:37:28Z")
> [@Zeriel](#): > > In all seriousness, for people playing along at home, I did what’s called “providing a cite”. You’ve been repeatedly told that your “expertise” is unrecognized, and responded by throwing insults and mis-representing the cites you DID put out. > > I looked on the CME groups listing of products offered on the NYMEX market, incidentally. Saw about what I expected to see, and what I was complaining about in the first place–a bunch of financial transactions traded as though they were commodities, and which exist not for the purpose of moving commodities but for playing stupid speculative games with a market for things that actual people are trying to use to produce actual goods. > > A tail is not a leg, no matter what you call it. A financial gamble indexed to a commodity is not a commodity future, no matter what you call it. You’re throwing the baby out with the bath water here with your ranting against commodity futures markets. The futures markets work - quite well. And for them to continue doing so, you need to have speculators. They are an integral part of the marketplace. As for the concern of people making bets that they can’t cover, in the 100+ year history of the CME there has never been a member that has failed to meet a margin requirement or delivery obligations that resulted in the other side losing money. If anything, you should be praising the exchange traded futures markets and demanding more of the financial space operate as they do - transparent with daily posting of collateral required. ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [December 7, 2011, 7:32pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2250 "2011-12-07T19:32:38Z")
> [@RTFirefly](#): > > It sure seems like Scylla frequently runs out of people who show him proper respect. Can’t imagine why that is. Perhaps they are unable to locate his hairy balls without a tweezers and a magnifying glass. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [December 7, 2011, 7:59pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2251 "2011-12-07T19:59:47Z")
> [@Scylla](#): > > Nonsense. Here the debate seems to be centered firmly around an area in which I posess singular expertise., Elsewhere I’m just another asshole with an opinion. What makes you so qualified? > [@Zeriel](#): > > There is plenty of room to say “if you couldn’t predict a major event with wide-reaching implications in your own field, maybe you don’t have the expertise you think you do.” > > Maybe no one does, for that matter. If it was predictable, the bubble would never have formed, it is a market failure not an expertise failure. > [@Scylla](#): > > I don’t know. I don’t think we should. Like I said on about page 4 or so of this thread, I think “too big to fail” is a bad thing. I have no problem with financial institutions taking big risk and committing financial suicide if they are dumb enough to do so. I simply have a problem with them being so big they bring the economy down with them. are you saying that you are in favor of trustbusting the large banks? > [@](#): > > Even an unsecured CDS has the full faith and credit of the issuer supporting it. A CDS simply means you have a third party covering a bet. That CDS is as good or as bad as the credit of that third party. I really have no problem with these, either. Not exactly true. CDS positions were bought and sold without regard to the creditworthiness of the counterparty. That is why there is a push to operate the CDS market through a clearing house who would act as the central counterparty for all credit default swaps. Were you actually involved in the CDS market or are you simply assuming that the behaviour was rational? > [@](#): > > “the value of the CDS market was significantly higher than the value of the bonds being gambled on by that market” > > Cite please. Well the notional amount of the CDS market was several times the value of the underlying REMICs. I’m not sure that the fact bothers me as much as the notion that you frequently had speculators on both sides of teh trade. Its one thing to have hedging activity on one side and a sepculator on the other side but when you have speculators on both sides it looks a lot more like a wager than a financial instrument. > [@RTFirefly](#): > > Ah yes, an ‘expert’ who seems to know jack shit about his own field, blaming a worldwide real estate bubble on Fannie and Freddie and the Community Reinvestment Act of 1977. Well if Scylla really believes that then he doesn’t know what he is talking about. > [@Zeriel](#): > > However, my understanding is that a credit default swap’s notional value DOES change hands if the reference bond defaults. > > For example, I buy a CDS from you on some arbitrary bond issue. That CDS has a face value of $10,000, and I pay you some amount of money per quarter for it, denominated in points on the face value. The notional value is $10,000, but the actual market value may well be pennies. However, the instant the bond issue defaults, you are on the hook to me for that $10,000. Well, there are different flavors of credit default swap. Some permitted you to put the underlying to the writer of the swap, others only required you to make up the missing scheduled payments (so if the underlying securities missed a payment, then you had to make up for it and if the securities started paying out you were off the hook until they missed payments again, if there was a short sale you were only liable for the shortfall). Frequently there was simply a benchmark pool of securities used > [@](#): > > So, considering I don’t have to have any interest in the actual reference bond to buy a CDS, three things follow from all that: > > 1. An arbitrarily small number of bond issues can support an arbitrarily large number of CDS instruments. > 2. If enough of those CDS are purchased against the same small subset of considered-stable bond issues, a tiny segment of the reference bond market defaulting could have a disproportionately gigantic effect on the economy and financial sector as a whole. > 3. Even if the actual market value of a CDS is tiny compared to the notional value in the non-default state, in the default state the notional value is owed as a payout by the issuer. Well, to be fair you can use a CDS to hedge risks other than the risk of the underlying pool of mortgages. They might be a good proxy for interest rate or inflation risk, they might be a good proxy for business cycle risk. Sure some of it was pure speculation/gambling but it might not be pure gambling. Another thing is taht if you get enough mortgages of a certain quality in a pool they will pretty closely reflect the performance of all mortgages of that quality so the performance of those mortgages (in theory) are no longer mortgage specific but might mroe accurately reflect more macro factors. > [@](#): > > Feel free to correct anything wrong with this analysis, as the entire concept of notional value of an instrument as I understand it seems a rather odd way to talk about something that’s effectively insurance. It is no more insurance than a put option is insurance. Sure some people use them to protect themselves from downside risk but others use it to speculate. The big difference is taht it is VERY easy for the writer of a put option to hedge their risk by shorting the delta but its a bit trickier to hedge cds risk so a lot of places just assumed away a broad based real estate collapse and used diversification to try and hedge away their risk (it didn’t work all that well). > [@Scylla](#): > > Realize that some of those CDS instruments offset each other. Not really enough to account for a significant part of the difference. > [@](#): > > Also, writing insurance while not being long the bond isn’t necessarily irresponsible. The question isn’t whether you are long the bond, but whether you have the financial wherewithal to cover the debt. Why the heck would you write teh CDS while being long the bond? that’s not a hedge. If youa re long the bond, you would BUY the CDS. There is no really good hedge for writing the CDS. And because of the nature of the risks you couldn’t have the wherewithal to cover the debt unless you were cash covered or nearly so. You were just betting that something really bad wouldn’t happen and in this case you were betting the company and our economy. > [@](#): > > This is the classic problem with insurance. For example MBIA insured municipal bonds. If a municipal bond went bad, no problem. It was built into their models and assumptions and they could cover it. What they could not cover is if a large proportion all went bad simultaneously. Bond insurance is not classically considered insurance in the sense that life isnurance or fire insurance is considered isnurance. Sure it protects against a loss but insurance generally requires a type of risk to which the alw of large numbers can be applied. That is a risk that diminishes as you adopt more and more of it. So for example if I sell one life insurance policy, I take a huge risk that the insured might die before I can collect enough in premiums to pay for the death benfit but if I sell a million life insurance policies to a million different people I can predict to a very high degree of certainty how much I will be paying out in any given year. that is how insurance companies work. > [@](#): > > The difference between a particular bond going bad and all bonds going bad is the difference between specific risk and market risk. There is a “floodplain” risk. This is taken from the notion that you are not really hedging your risks if you sell flood insurance to all the homes in a single flood plain so that an event that would cause a payout in one policy would likely cause a payout on all policies. And a collapsing real estate market in this case is the flood plain and this is why these sort of things are not considered insurance risk (which can be distributed) but investment risk (which can only be diversified). > [@](#): > > Most buyers of CDSs know and knew that they are good protection for specific risk but worthless for market risk. So, to me, the idea that these things didn’t work to mitigate market risk isn’t surprising. Errm. Most of these pools involved thousands of mortgages so there was not a lot of specific risk that wasn’t really market risk. In fact the risks that most folks focused on wasn’t even default risk, it was prepayment risk because the interest payments were frequently stripped from the principal payment and the interest rate piece would be worth more if there was no prepayment and the principal portion would do well if there was. > [@Scylla](#): > > Now, in this simple situation, I started with 10k I bought 90k worth of treasuries and bought 90k worth of CDSs. We now have a total notional value of 180k. This is 18x leverage for those of you keeping track. I don’t think you have 18X leverage or 180 worth of notional value. you have 90K of actual value and 90K of notional value and the leverage is only on the 90K of actual value. > [@](#): > > Let’s say I’m not happy losing 3% on the float while I wait for my interest rate bet to work. So, what I do is I strip my 90k of treasuries, breaking them into two pieces. One piece is the piece I care about, now a zero coupon treasury that will appreciate if interest rates drop. The other is 10 years worth of interest payments on these 90k of treasuries. That’s going to take 10 years is 1,8 to that cash flow, but I don’t plan on holding my bet that long, but I need the money to pay the interest now. Over ten years that is $18,000 worth of interest, or $1,800 a year. My carrying2 cost is $4,000 a year. So, what I do is I sell my my $18,000 worth of interest over ten years for a discount to face value now. Let’s say I get $10,000 for it. Now i have enough money to carry my bet for 2 1/2 years. Who will lend you money to buy treasuries and then let you strip those treasuries? I would like to open an incredibly large line of credit with them. > [@](#): > > Now, let’s look at the buyer of those stripped coupons. What does he have? He kind of has a reverse CDS, doesn’t he? No he doesn’t. He owns a series of debt instruments not a notional principal contract. Each of those interest payments is a zero coupon bond. With a CDS, the seller of the CDS might never have to pay a penny (you were better off with the insurance analogy, the difference there is more nuanced). > [@](#): > > He gets a big payment each year that the Treasury does not default for ten years, but than he never gets any principle. Now you can bundle these an leverage these and break them up into little pieces and make derivatives out of them to make them even more specific. > > That in a nutshell is how you do it. You can get much much more complex. Discussion of treasury strips is not extremely helpful in discussing mortgage security strips because of the prepayment risks. > [@](#): > > Pretty much the same thing. Sometimes you may do this because it may not be feasible or it may be too expensive to unwind or sell a contract and it’s cheaper to close out the position by buying an offsetting position. Such a set of transactions may have a high notional value, but it’s real value was fixed the moment it was offset and it’s affect is exactly 0. People didn’t routinely offset a CDS position by entering into a mirror CDS position, they simply liquidated their current position. If someone is willing to buy a CDS from me then they were also willing to buy one that I had bought from someone else (at least before the crisis) because the market viewed almost all CDSs as fungible. You might hedge a CDS on subprime mortgages with a CDS on AAA mortgages or CDSs that were regional against CDSs with antional exposure but that is not the sort of stuff that blew up AIG. > [@](#): > > Generally speaking, if you wish to responsibly evaluate a bond, you do so based on credit risk. …There is other risk which is called market risk. … They are supposed to consider that risk as well but when the risk is that remote it doesn’t really impact the analysis very much. > [@Zeriel](#): > > …Unless I decide to go play stock market maven, and then suddenly I’m leveraged up to 18x. > > Then I look at Lehman Brothers, and their 30.7x reported leverage (I’m given to understand the bankruptcy lawyers claim that’s significantly understated), on riskier investments. > > Seems to me that a lot of the damage associated with market risk could be mitigated by putting a fairly severe cap on how much leverage a company can have. 3% capital reserves are not exactly rare. In recent history banks were borrowing money at the discount window at 0.01% to buy treasuries paying 0.25% and getting at least 30 to 1 leverage. > [@Scylla](#): > > You have it backwards. Physical assets depreciate. Securities, as a rule, tend not to. Do you mean physical assets like gold or like a factory? Because a factory (or a car for that matter) provides value as it depreciates and securities frequently do something similar called amortize. > [@](#): > > Hedging for example is a strategy for lowering risk, and quite often that requires leverage and large amounts of it. That’s how the guy who delivers your heating oil, can fill his million gallon tank, but still sell it to you 2 months later at the market price, after the price has dropped without taking a loss that would put him out of business. > > In order for this to happen you need somebody to take the other side of the bet. You don’t seem to recognize this, a market has two sides. > > A speculator buys risk. You may think there is something morally wrong with this, but I think it’s dumb to judge. Their buying of risk allows other people to lay off their risk. Sure, speculators are necesary to cover temporary mismatches and to aid the market clearing process but the guy who delivers your heating oil isn’t buying a future from some speculator to hedge against the change in oil prices, they are locking in their price with the supplier and the supplier is simply locking in the price at which they will sell their inventory. I don’t see where the leverage comes into play. > [@Zeriel](#): > > I don’t think it’s the securities that are even necessarily the problem, though. It’s the idiotic, mindless risks that financial institutions take with them, to places far beyond what their own employees advise “ordinary” people to do. To be fair they thought the remote risks to the economy were worth the huge bonuses they were going to get and frankly noone was telling them not to. > [@](#): > > I think it’s morally wrong to buy risk you can’t afford. If you have the cash to cover it, buy whatever risk you want. If you’re leveraging or hedging, and a market crash CAN kill you anyway (let alone if it does or not), you are morally wrong. Then you are basically telling us to get rid of the modern banking system. We habve a fractional banking system and we wouldn’t be able to do that if we followed your rationale. The difference of course is that banks are regulated by the government and pay FDIC insurance premiums to the government before we bail them out. Investment banks energetically resist all regulation and do not want to pay into an industry insurance fund but still end up gettign bailed out. Perhaps the problem isn’t high finance, perhaps the problem is low regulations. > [@Zeriel](#): > > Well, realistically, “excessive leverage” is hard to measure, since it’s effectively “leverage that you can’t cover if you lose”. Depending on the firm’s income from non-securities sources and how it’s managed, that could be a lot or next to nothing. > > I did note I’d be happy as a start to see Regulation T apply to all securities and equity instruments across the board–as written it mandates a 50% margin reserve for non-exempt equities with strict rules about how other securities can be used to cover the margin instead of cash. As I understand it, that reserve translates to something like a 2-to-1 accounting leverage on any given transaction. The regulations for leverage on treasuries is much higher. > [@](#): > > One can speculate, and buy and sell corn that won’t be planted until years from now with no intention or ability to make good on delivery, which nobody aside from a very few institutions (if anybody) will ever do. There is hardly a more notional less concrete market. The market for corn futures that go out more than a year is pretty thin. > [@](#): > > It is this very speculative nature of this market that allows people on the other side to hedge their positions and sell you fuel oil or flour, or whatever else at reasonable and consistent prices and keep the flow of goods and inventory moving. > > This, in fact, is the nature of most if not all highly speculative markets. They filter the risk from those who don’t want it, or can’t afford it. A bread baker does not need to spend his time chasing after next year’s supply of flour and wondering if he can get it at a price that lets him fulfill his contracts while making a fair profit. That’s why he uses the commoditties markets to lock in his price. > > The speculators, those that take high risk, make that possible. Most times it works pretty well. Speculators are not really absorbing most of this risk. The baker is locking ina price to buy flour from a guy who locks ina price to buy wheat froma farmer who locks ina price to sell wheat. > [@Zeriel](#): > > Look, fucker, I’m telling you fucknozzles how to fix the system–stop treating it like a goddamn slot machine and then whimpering about “oh god, how could we have EVER forseen MARKET RISK?” One can speculate, but that one is a complete asshole for doing it if they’re betting with none of their own money down, or on things happening years in the future. > > God, people wonder why the market is so fucked up. The problem isn’t the speculation the problem is that we incentive risk taking through the way we compensate folks. > [@Scylla](#): > > Seeing as you have no clue whatsoever about what you are talking about, yes, arguing with me is a mistake. You remind me of the saying “a little bit of knowledge can be a dangerous thing” ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [December 7, 2011, 8:02pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2252 "2011-12-07T20:02:07Z")
> [@Trom](#): > > You’re throwing the baby out with the bath water here with your ranting against commodity futures markets. The futures markets work - quite well. And for them to continue doing so, you need to have speculators. They are an integral part of the marketplace. As for the concern of people making bets that they can’t cover, in the 100+ year history of the CME there has never been a member that has failed to meet a margin requirement or delivery obligations that resulted in the other side losing money. > > If anything, you should be praising the exchange traded futures markets and demanding more of the financial space operate as they do - transparent with daily posting of collateral required. To be fair, if CDSs were traded through a clearinghouse or exchange, things would never have gotten so out of control at least on the CDS side. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [December 7, 2011, 9:00pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2253 "2011-12-07T21:00:18Z")
At several points, you have contradicted Himself. You realize the potential consequences of your folly, I trust? ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 7, 2011, 9:01pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2254 "2011-12-07T21:01:24Z")
> [@Damuri\_Ajashi](#): > > To be fair, if CDSs were traded through a clearinghouse or exchange, things would never have gotten so out of control at least on the CDS side. Yep. I completely agree. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [December 7, 2011, 10:19pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2255 "2011-12-07T22:19:40Z")
> [@elucidator](#): > > At several points, you have contradicted Himself. You realize the potential consequences of your folly, I trust? I don’t know if Scylla is as involved in finance as he claims but noone is an expert on all areas of finance any more than any given lawyer is an expert on all the laws or a doctor is an expert on all of medicine. However he doesn’t seem to have a problem claiming expertise in very diverse areas of finance by extrapolating whatever he may understand about general finance principles. He should know better than to do that but I guess he felt like the one eyed man in the land of the blind. For example, you would think that you would really really care about counterparty risk when entering into a credit default swap with billions of dollars of notional value and that you would only consent to a change in the counterparty after consideration of the creditworthiness of the new counterparty and after you made sure that you weren’t concentrating too much credit risk in the proposed new counterparty. Well, that isn’t how the market worked. It was the wild fucking west. People were making money hand over fist and they relied on the collateral requirements of the swap agreements to protect them. If you were going to be a stickler about my ability to sell my position in a credit default swap (it frequeently required consent but a lot of times people didn’t even bother getting consent, they just sent their old counterparty a notice telling them they now had a new counterparty) then noone was going to do much business with you and there was just too much money floating around for people to get frozen out of the game over something as “trivial” as creditworthiness. ---
**Author:** ![Zeriel](https://avatars.discourse-cdn.com/v4/letter/z/58956e/32.png) [@Zeriel](https://boards.straightdope.com/u/Zeriel)\ **Post date:** [December 7, 2011, 10:48pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2256 "2011-12-07T22:48:41Z")
> [@Trom](#): > > If anything, you should be praising the exchange traded futures markets and demanding more of the financial space operate as they do - transparent with daily posting of collateral required. While I do appreciate the fact that they’ve got an excellent track record, I still think there are elements of moral wrong in the ways that they operate. Financial futures, wherein one is not actually ever required to engage in any trading of the commodity ostensibly being purchased, has no qualitative difference in my mind from straight-up gambling (with the various broker commissions providing the “house edge” like rake at a poker table, eve). Further, that gambling affects (one could even say, distorts) the market in the actual product being traded, while insulating the gamblers from same. I have less of an objection to speculation in actual commodities futures–if only because I find a small amount of ridiculous satisfaction in the idea that someone who participated in driving up the market price of an item (via speculative bubbles and such) getting stuck with a few tanker truckloads when no one’s buying when it comes due. ---
**Author:** ![Zeriel](https://avatars.discourse-cdn.com/v4/letter/z/58956e/32.png) [@Zeriel](https://boards.straightdope.com/u/Zeriel)\ **Post date:** [December 7, 2011, 11:43pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2257 "2011-12-07T23:43:22Z")
> [@Damuri\_Ajashi](#): > > 3% capital reserves are not exactly rare. In recent history banks were borrowing money at the discount window at 0.01% to buy treasuries paying 0.25% and getting at least 30 to 1 leverage. There’s a distinction to be drawn between banks who are payees into a federal program that insures against catastrophic losses of specific types of accounts, and everyone else. You make that distinction yourself later in the same post. > [@](#): > > To be fair they thought the remote risks to the economy were worth the huge bonuses they were going to get and frankly noone was telling them not to. There’s that \*evil \*greed showing up again. I can understand actions with a remote catastrophic risk if that risk attaches to the action-taker–greed isn’t BAD, per se, except when it motivates the greedy person to cheat. I can understand them if not taking the action has severe consequences–desperate times call for desperate measures. What I cannot understand is how anyone with any moral fiber in their being can make the decision “There’s a chance this will screw up the entire economy, I’m not likely to personally suffer from that chance except for having slightly fewer fuckloads of money, and the only consequence of not taking this action is that I have slightly less more-money-than-I-can-spend. Yeah, let’s do it, I might get even richer!” > [@](#): > > Then you are basically telling us to get rid of the modern banking system. We habve a fractional banking system and we wouldn’t be able to do that if we followed your rationale. **The difference of course is that banks are regulated by the government and pay FDIC insurance premiums to the government before we bail them out**. Investment banks energetically resist all regulation and do not want to pay into an industry insurance fund but still end up gettign bailed out. Perhaps the problem isn’t high finance, perhaps the problem is low regulations. I wouldn’t disagree with anything in this paragraph, especially because you point out the salient difference in the bolded bit. It’s like Scylla pretending there’s no difference between a financial futures contract and currency to try to accuse me of wanting to go to the barter system. – As an aside, it amuses the hell out of me to see someone shooting down the High Financier. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [December 7, 2011, 11:59pm UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2258 "2011-12-07T23:59:31Z")
> [@Zeriel](#): > > While I do appreciate the fact that they’ve got an excellent track record, I still think there are elements of moral wrong in the ways that they operate. Ok… I don’t. I think the benefit regulated commodity exchanges provide to society at large is a pretty neat thing. > [@Zeriel](#): > > Financial futures, wherein one is not actually ever required to engage in any trading of the commodity ostensibly being purchased, has no qualitative difference in my mind from straight-up gambling (with the various broker commissions providing the “house edge” like rake at a poker table, eve). > > Further, that gambling affects (one could even say, distorts) the market in the actual product being traded, while insulating the gamblers from same. Are you arguing that speculators serve no economic function? > [@Zeriel](#): > > I have less of an objection to speculation in actual commodities futures–if only because I find a small amount of ridiculous satisfaction in the idea that someone who participated in driving up the market price of an item (via speculative bubbles and such) getting stuck with a few tanker truckloads when no one’s buying when it comes due. Doesn’t happen. Why do you assume speculators are always long? Right now speculators are heavily net short natural gas and wheat. Shouldn’t that make them the good guys in this situation? ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [December 8, 2011, 1:02am UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2259 "2011-12-08T01:02:40Z")
Damuri Ajashi: > [@](#): > > What makes you so qualified? A couple of years as a bond trader, trading CMOS,Corporates, and Munis with a wirehouse. Another 15 years or so in various related roles, the specifics of which I can’t disclose. And you? > [@](#): > > are you saying that you are in favor of trustbusting the large banks? Yes. I think I am. > [@](#): > > Not exactly true. CDS positions were bought and sold without regard to the creditworthiness of the counterparty. That is why there is a push to operate the CDS market through a clearing house who would act as the central counterparty for all credit default swaps. In what way does that contradict what I said? I’ll repeat it: “Even an unsecured CDS has the full faith and credit of the issuer supporting it. A CDS simply means you have a third party covering a bet. That CDS is as good or as bad as the credit of that third party.” I wasn’t commenting on the rationality of the marketplace for CDS’, but rather what defined the creditworthiness of a given issue. While parts of the CDS market were irrational, some others were less so. > [@](#): > > Were you actually involved in the CDS market or are you simply assuming that the behaviour was rational? Again, I was not commenting on the behavior of the market in the quote you cited but rather as to the creditworthiness of a given CDS. I was not and am not directly involved in the CDS market, but am familiar with them as components to structured investments. > [@](#): > > Why the heck would you write teh CDS while being long the bond? that’s not a hedge. If youa re long the bond, you would BUY the CDS. There is no really good hedge for writing the CDS. And because of the nature of the risks you counoldn’t have the wherewithal to cover the debt unless you were cash covered or nearly so. You were just betting that something really bad wouldn’t happen and in this case you were betting the company and our economy. I can’t think why you would. The context of the quote was that I was responding to Zeriel who was saying that it was irresponsible of for someone to write a CDS who **wasn’t** long the bond. I’ve had issues attempting to explain basic concepts to Z,and had already pointed out what an idiot he was, and I couldn’t think of a gentle way to explain that doing so was like selling was like selling somebody else life insurance on yourself. Rather, having somebody else sell that life insurance isn’t necessarily irresponsible. If I would have stopped to try to correct every thing he said that was wrong this would be close to fifty pages. So no. I did not say that you would want to write such a CDS. I simply said that it wouldn’t necessarily be irresponsible for somebody who was not long a given bond to write a CDS on it. You seem to agree that this is true. > [@](#): > > Bond insurance is not classically considered insurance in the sense that life isnurance or fire insurance is considered isnurance. Sure it protects against a loss but insurance generally requires a type of risk to which the alw of large numbers can be applied. That is a risk that diminishes as you adopt more and more of it. So for example if I sell one life insurance policy, I take a huge risk that the insured might die before I can collect enough in premiums to pay for the death benfit but if I sell a million life insurance policies to a million different people I can predict to a very high degree of certainty how much I will be paying out in any given year. that is how insurance companies work That’s not true municipal bond insurance is considered insurance. I have no idea what you mean by classically. In your example everything that applies to life insurance also applies to, say, municipal bond insurance. You have a cite or something to suggest that anybody else thinks as you do? > [@](#): > > There is a “floodplain” risk. This is taken from the notion that you are not really hedging your risks if you sell flood insurance to all the homes in a single flood plain so that an event that would cause a payout in one policy would likely cause a payout on all policies. And a collapsing real estate market in this case is the flood plain and this is why these sort of things are not considered insurance risk (which can be distributed) but investment risk (which can only be diversified). You are simply saying what I just said in another way. When I said that they didn’t consider credit risk was actually market risk that is like saying they didn’t know that all those homes were on the same flood plain. > [@](#): > > Errm. Most of these pools involved thousands of mortgages so there was not a lot of specific risk that wasn’t really market risk. In fact the risks that most folks focused on wasn’t even default risk, it was prepayment risk because the interest payments were frequently stripped from the principal payment and the interest rate piece would be worth more if there was no prepayment and the principal portion would do well if there was. I wasn’t talking about a pool, a structured investment or a CDO. I was referring to a single CDS on a specific issue, in the abstract, to illustrate how they were backed… or not. > [@](#): > > I don’t think you have 18X leverage or 180 worth of notional value. you have 90K of actual value and 90K of notional value and the leverage is only on the 90K of actual value. You are correct. My mistake. > [@](#): > > Who will lend you money to buy treasuries and then let you strip those treasuries? I would like to open an incredibly large line of credit with them. It’s an illustrative example. You’re being a picayune prig, don’t you think? I’m trying to explain a larger concept, and a digression on how stripping and selling the coupon is going to require additional collateral or else result in a margin violation was a bit of a digression that wasn’t super germaine to the point at hand. > [@](#): > > No he doesn’t. He owns a series of debt instruments not a notional principal contract. Each of those interest payments is a zero coupon bond. With a CDS, the seller of the CDS might never have to pay a penny (you were better off with the insurance analogy, the difference there is more nuanced). Ok. How would you explain it so that a hostile laymen could understand it? I’m genuinely interested. > [@](#): > > Discussion of treasury strips is not extremely helpful in discussing mortgage security strips because of the prepayment risks. Why does it have to be mortgages? We could be discussing a CDS on a simple treasury, or a corporate bond. You seem to think that everything that I am saying about CDS is strictly withing the context of a CDS on a CDO. This is not the case. Im going to stop right here. Your objections seem to center around either not understanding the context of my remark, or, taking specific issue with a conceptual example, or, assuming that all CDSs are on mortgage backed securities (or that that’s all I’m talking about.) Is that fair? ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [December 8, 2011, 1:06am UTC](https://boards.straightdope.com/t/occupywallstreet/596851/2260 "2011-12-08T01:06:30Z")
> [@elucidator](#): > > At several points, you have contradicted Himself. You realize the potential consequences of your folly, I trust? It’s like saying Bloody Mary three times, isn’t it? [Previous page](https://boards.straightdope.com/t/occupywallstreet/596851.md?page=112) [Next page](https://boards.straightdope.com/t/occupywallstreet/596851.md?page=114)