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Closing The Barn Door After…

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February 25, 2009 – Comments (0)

Saw several interesting ideas floating around in the media today, so will blogit just in case I forget a few weeks hence. Problem is, the stories have sort of blurred, so not sure what belongs to whom, but the primary suspects are Volcker, Greenspan, Summers, Geithner. Nice ideas, guys; they are all things we should probably do so we do not get into this type of mess again, but these thingamabobs do not solve the current problem.

DERIVATIVES

These must go through a clearinghouse. This will this give transparency to exactly whom, what, and how much. It will also prevent a panicky financial institution from running around like a headless chicken trying to dump a wheelbarrow full of MBSs.

CREDIT DEFAULT SWAPS

These doodads have to be regulated/limited. I would be willing to bet that before this past Halloween, none of you had ever heard of a CDS, much less know that there were $10T’s of them floating around and held by the same companies that carried your car insurance, 401K’s, and checking accounts, threatening their very existence.

GLASS-STEAGALL

At least partially reinstating GS (no, no, I am not referring to Goldman Sachs, even though we all probably owe them a bottle of nice wine) sounds like a good idea. If it had never been repealed in 1999, this financial meltdown would never have occurred. However, one newswire story said that 40% of all profits from JPM and BAC came from these things from the “capital markets”. Besides, banks now own investment banks that are suppose to be doing these things.

MARK-TO-MARKET

This “fair value” doohickey from GAAP tells you at what value you are to carry level 3 securities on your balance sheet. When these thinly traded things go down, you have to write them down on your balance sheets and raise capital. This thing IMHO is the prime cause of the GREAT STOCK MARKET CRASH OF 2008, snippy newsletter from the GAAP board notwithstanding (you have MBSs, a few get sold at firesale prices by a panicky wall street firm, so the ones you have in your vault are now to be put on your balance sheet at this price). This rule needs changing. The hypothetical derivatives clearinghouse might help this one.

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