Is an economic takeover of the automobile industry truly "socialism?" There's no denying that it's dipping its toe in the waters of socialism, but it's not truly there. The financial bailout? Not as overt, but we're still throwing government money at industry, so I get from where the argument is made.Don't be so naive as to worry which -ism is involved. It doesn't matter if it's Soviet-style socialism, Fabian socialism, modern America's socialism, or the effective equivalent called fascism -- any of them are still government control of certain goods and services, maybe all.

Does "ownership" really mean much if someone is pulling your strings?
Goldman Sachs was essentially given a big, sloppy no-strings-attached wet kiss from the government when AIG was "bailed out" (which, by "bailed out," we mean "money funneled through AIG to pay Goldman off for Goldman's shitty pile of worthless paper"), which lead to what? Record bonuses and a fuck-you-America return to risk in their market.Goldman would have still remained profitable, just not as much, so they didn't need any "bailout." However, they and Wells Fargo couldn't refuse. The other seven major banks at the first meeting did need bailouts, and Paulson had already decided how much each would get. Whether or not you believe the doors were really, physically locked, there was no opting out.

So for this and another reason, I'm somewhat critical of Goldman but not too much. It's on track to pay out "record bonuses" while it still owes billions to federal taxpayers, but remember that it can repay the TARP loans only as Uncle Sam allows. Payday lenders are criticized for making high-interest loans to people that weren't forced into it, who could pay the loan back at any time. Yet the federal government receives no major criticism for forcing loans upon banks in exchange for huge equity stakes (remember that it owns a third of Citi), and stretching out the loans for what's effectively perpetuity.
I mean, at bare minimum the government could mandate that risky derivatives be traded in an open market with full benefit of information for all players, right?Sure, why not. I mean, every government "mandate," particularly in matters of finance and economics, has always turned out to be an unmitigated disaster, so why not in this?

A mandate never turns out as easy, or as noble, as it's first proposed. There would be 1000 pages of gobbledygook that, at best, would make unnecessarily complex the definitions of "risky," "open" and even "information." At worst, it would warp the true definitions and attach so many strings that any exchange under these terms would hardly be "open," let alone faciliate "full benefit of information."

Actually, derivatives markets are extremely open and transparent, and not from any of the onerous regulations like the Commodity Futures Modernization Act of 2000 (which covers credit default swaps). The Lehman CDS auction surprised most people by going so smoothly, but I wasn't surprised. Government doesn't have to force buyers and sellers to sit down: it need only stop hindering the willing buyers and willing sellers from sitting down and figuring out acceptable prices on their own. Buyers bought Lehman CDS for pennies on the dollar because, well, that's all they were worth.

The latest proposals actually sound decent to me, not because they're regulations, but because they're a result of the industry coming together to standardize certain practices. Manding things like standard exchanges will simply NOT work for credit default swaps. They're not standard derivatives like options and futures. A CDS is a contract that's typically unique and thus requires negotiations for its specific conditions. This means that both buyer and seller know what they're getting into (fulfilling the "meeting of the minds" requirement of a valid, enforceable contract).

The real free market solution is to let people trade via whatever market mechanism they want: if they don't trust that a particular exchange is transparent (or sufficiently so), then they don't have to trade on that exchange. If they don't trust that someone negotiates in good faith, then they'll do business with someone else.

Now, one thing about information you must realize is that it can't be open to "everyone." Take my employer, whose success even in these times comes in no small part from our research staff, among the very best in the world. This isn't "inside information," but it's secret enough that we don't publicize it. You probably would say, "OK, that information wouldn't be required to be open." But how many liberal schmucks like Schumer would say, "Hey, let's require that all research be made available to everyone, that would foster competition," when in fact it would do the opposite.
A CDS taken out by Goldman on JP Morgan Chase effectively means GS thinks JPMC is going to fail.Uh, no. I take it you don't know what a CDS really is about. It isn't necessarily a negative position, and it does not "effectively," implicity or in any wise say that "____ is going to fail." Many CDS are simply used to hedge.

This will make it easier for you: stop thinking of them as derivatives, and start thinking of them as insurance policies in case a single undesirable event happens. That's why AIG got into so much trouble: it sold more CDS than it could cover, thinking none of the events would happen.
Shouldn't the market be aware that GS has this belief, and wouldn't the board at JPMC like to take action to prevent failure? Is this info not valuable?Uh, no, no and "yes but not in the way you think."

1. Neither of the two parties should be required to "disclose" the CDS at all. Why should they? If XYZ buys a CDS on ABC, then it's probable that XYZ's research analysts figured out something that everyone else didn't. They deserve to act exclusively on their conclusions, without everybody riding on their coattails.

2. You don't think that the board of any particular company already tries to keep the company from failing? They already have access to all inside information they need. They don't need someone else telling them, whether it's a business partner or someone buying a CDS, telling them they're in trouble.

3. See #2. The information is valuable, and it would lose value if it's disclosed to everyone.
So we toss them a pile of money and got... non-voting stock? Really? If we want to play with the conceit that "we own GM now," and that's not far from the truth, shouldn't we have a seat at the table to influence their business?Actually, that the shares are preferred didn't matter. We the Taxpayers put up the money, as forced financing for something more sinister. You don't think that the federal government is already exercising incredible control over the operations? GM's CEO resigned last March specifically at Obama's "request." I fully expect the Volt to get as much subsidizing as necessary to bring down the price, perhaps with a combination of higher CAFE standards.
Plus, we should have game-planned a way out of the ownership entanglement too. Something like, "once the stock hits $XX.XX/share, it will be sold back into the market."This was specifically avoided. The federal government doesn't care about profits: it wants to achieve and maintain control.

The American people would notice (though maybe not do anything about it) outright nationalization a la Venezuela, but voters won't bat an eyelash if the federal government proclaims something "in need of saving."
In the meantime, the auto companies still have the same leadership (for the most part) that got them into this mess.Most of the names are still there, but they're just puppets now. They can keep their jobs if they do what the feds say. Rick Wagoner had to be sacrificed as a warning to the others: "This could be you next."
Again, I'm not making a value judgment whether tossing money to these industries was a good thing or bad. I'm not an economist, and there are a multitude of ways to look at this from a cost/benefit perspective. Actually, real economics does not make value judgments like "good" or "bad." It can analyze costs and benefits, but without calling one option "good" and another "bad."
I'm simply saying that a free market consumer has certain rights and privileges that come with taking an ownership stake in an organization, and it's absolutely clear to me that our stake as taxpayers is somewhere between nominal and non-existent.In a free market, there are actually no "privileges." There are inherent rights that an individual has, and contractual rights. Property rights and votes at shareholder meetings are an example of the former. An example of the latter is the right to pay off a CDS (typically with a specified bonus) to get out of the contract.

Only an authority with power over you, like a government or parents, can grant "privileges." Parents do it by right, because they're responsible. Government is not and cannot be responsible for the individual, though, yet constantly grants "privileges" to "allow" individuals to do that which they already have the right to do.
I'm angry about government intrusion too, just like Matt Welch's Americans. I want more intrusion, and remain pissed off that we didn't get to set a more equitable set of rules as owners of industry in this flatlined economy.So let's get this out in the open. You're saying that all the regulations and laws that created this mess in the first place aren't enough? Even if you think that they can create different rules, it's still the same mob. You're never going to get anything good out of them. That's the nature of government. The free market creates through individual freedom; government can only redistribute, by force, what was already created.

Andrew Weiner called insurance companies "pyromaniacs" the other day, when in fact, as I've said for months, he and others in the federal government are the arsonists. And somehow you and most Americans trust them to put the fire they started in the first place.

I've never bought this argument that Americans want less government. They want less government when it's convenient for them, but few Americans mind a large government when it's others who pay for it.

Perry scores a first round knock out.
Ouch.
Someone call a bureaucrat to pick "Notorious B.G." up off the floor.

Although this "Notorious B.G." person did throw a stinging blow when he ended his "caveat" with, "so there's that."

I really adore the argument that acting on information should be done in secret, to protect the inherent value of that information from those that didn't have the ability to put the pieces together on their own.

An inability to accurately price risk is a problem, and one that a more standardized product traded on an exchange would solve. Again, if you want to operate on the conceit that government would just muck it up by writing an unwieldy bill with ridiculously complex rules, throwing unnecessary wrenches in the gears in the process, be my guest. I'm arguing a more abstract notion that if you're a participant in a market, you should have some idea how to accurately price your risk when investing.

The shell game of carving up derivatives, obtaining ratings from insurance agencies based on false premises, and then hedging with CDS instruments (the purchase of which is an admission that the underlying organization has a non-zero chance of failure - I clearly got it wrong in the initial post, but I stand by the sentiment) was a multi-layered process designed to foster the injection of wild amounts of capital into the market based on highly flawed evaluations of risk.

I'm saying the financial system needs sensible regulation (in the form of greater transparency and visibility) and reform.

And to answer the "our information is our competitive advantage" point, I agree with you that a detailed understanding of mispriced assets in the marketplace can be a significant advantage. Being first to market with a profitable idea usually is a significant advantage. I simply believe that massive exchanges of capital, whether hedging on CDS instruments or the purchase of packaged derivates, should be done above-board in a real-time exchange to allow the next entity to come in or out of the market to understand better the true value of what it is they're buying or selling.

Let's clear up a few things.

1. A CDS is an admission that there's a non-zero chance of a company defaulting, but so what? A CDS is an insurance policy, plain and simple, and purchase of any such policy is an admission that there's a non-zero chance of a negative event happening. That doesn't mean anything. If I buy a life insurance policy, it doesn't mean I think I'll die, it just means I want to hedge my financial situation if I happen to.

2. When private corporations come up with independent research about a company, they have no obligation to disclose that research to the street. Otherwise, there'd be no incentive to do such research.

3. If actors in the arena would like to buy a CDS contract (to hedge a corporate bond purchase, let's say), and they don't feel they have the capacity to do their own risk assessment in order to gauge the price they should pay, they can avail themselves of hundreds of firms who do this market research for a fee.

4. Those same actors should follow the phrase, "Caveat Emptor" when purchasing outside advisement, just like you would/should if you were listening to a financial advisor tell you to how to invest your money.

In short, there's nothing wrong with CDS contracts. There *were* serious issues with credit ratings agencies, and I would agree that the degree to which these agencies can be bought/biased should be more transparent.

But I have to disagree with Perry about one thing. Public companies MUST make a full disclosure of all their assets and valuations to the best of their knowledge. It is for the good of the shareholders, who after all OWN the company, that they understand what they own and what risks their investments are subject to. It's true, not all risks can be accurately quantified, but there are valuation methods that can make educated guesses and at least make the worst case scenarios clearer. I realize that full disclosure of assets makes certain proprietary knowledge available (competing firms can imply your risk assessment of an underlyer by finding out what you paid to hedge against it), but a monthly or quarterly snapshot is hardly giving away competitive advantages. It simply squeezes the margins a bit. In return, you get a more transparent market which is good for stabilization of volatility and eases good faith entry of new capital into the system.

I really adore the argument that acting on information should be done in secret, to protect the inherent value of that information from those that didn't have the ability to put the pieces together on their own.You say this sarcastically, but it's true. Let's say my employer buys a huge CDS on a particular event. Why should everyone get a free ride on our investment?
An inability to accurately price risk is a problem, and one that a more standardized product traded on an exchange would solve.If you cannot price something to your satisfaction, the free market solution is easy: don't buy it.
Again, if you want to operate on the conceit that government would just muck it up by writing an unwieldy bill with ridiculously complex rules, throwing unnecessary wrenches in the gears in the process, be my guest.Ahem, it's no "conceit." It's been proven countless times by government at any level. Look up what's called "The Law of Unintended Consequences."
I'm arguing a more abstract notion that if you're a participant in a market, you should have some idea how to accurately price your risk when investing.Sure, but it's a platitude. But your means (i.e. using government to set standards and enforce them) leave much to be desired.
The shell game of carving up derivatives, obtaining ratings from insurance agencies based on false premises, and then hedging with CDS instrumentsOutright fraud was undeniably a component, but that's not part of the free market. Lots of Collateralized Debt Objects were misrepresented as safe, as were some auction rate securities, and there will be hell to pay with the ratings agencies giving "overly optimistic" ratings.
(the purchase of which is an admission that the underlying organization has a non-zero chance of failure - I clearly got it wrong in the initial post, but I stand by the sentiment)Now you're saying something different, after I corrected you. "A CDS taken out by Goldman on JP Morgan Chase effectively means GS thinks JPMC is going to fail." Remember that?
was a multi-layered process designed to foster the injection of wild amounts of capital into the market based on highly flawed evaluations of risk.Actually, the different tiers are intended to make a profit, nothing more. Buying a financial instrument, then an insurance policy on that instrument, does not inherently increase capital. And what's so wrong with that?

Capital is always finite in a free market. Money has a particular velocity and will always flow, but it's still finite. I suspect the reason you think derivatives increase capital is because there's said to be $50 trillion or so in total liabilities -- but that doesn't mean all of it will happen at once. Think of it like the human brain: not all neurons fire simultaneously (a good thing because it would be fatal). I could buy a put option on x shares of stock that could cost the seller a billion dollars, or a CDS for a penny on the dollar: they create liability but do not actually increase the stock of money. I'm out the premium I paid for the put option, or the money I paid for a CDS. Should I exercise the put, or my CDS pays off, I make a profit at the equal expense of the other party.

What does inflate capital is central bank action, and Fannie and Freddie's actions -- there is your "injection of wild amounts of capital," all because of government.
I'm saying the financial system needs sensible regulation (in the form of greater transparency and visibility) and reform.Transparency and visibility can exist on their own, when buyers demand them. Again, they don't have to buy something they don't want. Do you know the origin of Wall Street? No government was necessary to bring buyers and sellers together. They just did.

You can rely on government all you want, but there's no hypothesizing or guessing as to what will happen. We have government's record on "regulation" and "reform."
And to answer the "our information is our competitive advantage" point, I agree with you that a detailed understanding of mispriced assets in the marketplace can be a significant advantage. Being first to market with a profitable idea usually is a significant advantage.That's the basis of the Austrian entrepreneur (this is not a reference nationality, it's an economics school). Schumpeter's concept was simple, that of a "risk-bearer." Kirzner and Austrians since developed it into someone who happens upon information that no one else has, often by being better (e.g. keen observation or being prepared to discover it) rather than happenstance.
I simply believe that massive exchanges of capital, whether hedging on CDS instruments or the purchase of packaged derivates, should be done above-board in a real-time exchange to allow the next entity to come in or out of the market to understand better the true value of what it is they're buying or selling.As I explained, this is not possible with CDS. They're too specialized and typically take a while to negotiate. Then there's the second reason, which I'll keep hammering: why is it anyone else's business? It's not just a matter of intellectual property rights, but one of practicality: if someone wants to ride my coattails, then that reduces the value of my information, and hence my motivation in the first place.

There are already exchanges where traders voluntarily reveal their actions in return for knowing others. The existence of the NYSE, NASDAQ, Nikkei, etc., are by choice. They work very well on their own and don't need government meddling in their affairs.

"I've never bought this argument that Americans want less government. They want less government when it's convenient for them, but few Americans mind a large government when it's others who pay for it."

Those would be the people who pay zero net income tax, which is around 47% of income earners.

So sure, there are probably lots of people who want more goodies from the gummint.

Hey Perry,

I know I'm pitching you a couple of softballs here, but since Mr. Notorious B.G. seeks regulation of our financial institutions, isn't it true that Chris Dodd and Barney Frank have been in charge of oversight of the henhouses during the past few years ?

And by the way, wasn't there a chap named "Geithner" who was recently the CEO of the Federal Reserve Bank of New York---and that falls into the jurisdiction where Wall Street is, isn't that true ?

Let 'er rip, Mr. Eidelbus !

Strange, Jamie, I didn't see your comment till today.Public companies MUST make a full disclosure of all their assets and valuations to the best of their knowledge. It is for the good of the shareholders, who after all OWN the company, that they understand what they own and what risks their investments are subject to.Disclosure should be a given, particularly to the owners of a company, but it should not enforced by government. A public exchange can impose its own full disclosure requirements if an issuer wants its securities to trade on that exchange. And if someone doesn't trust a particular issuer, or the exchange itself, then he can take his business elsewhere.

One reason my employer enjoys a good reputation is that we exceed any government requirements. I like to think we set the standard, and it shows when we're consistently ranked as one of the top transparent companies in the country. We file 10-Ks and 10-Qs, and 8-Ks as necessary, and we would anyway in the absence of government regulations. Most companies would.

So I'm effectively arguing that someone can just go to a competing exchange, which is easier said than done, right? Actually, it shouldn't be so difficult. It's hard just to registered with the SEC as an investment advisor. It's often argued with many things that there's a lack of competition, but in many cases (like health care and finance), it's government regulation that creates barriers to entry.
It's true, not all risks can be accurately quantified, but there are valuation methods that can make educated guesses and at least make the worst case scenarios clearer.Sure. A core principle of Austrian economics is that information is imperfect, because total knowledge is dispersed throughout society. The entrepreneur is the one who has better information by whatever means he can employ, whether it's noticing something, calculating something better, or just guessing. iPods. New Coke. Amazon.com. Pets.com.
I realize that full disclosure of assets makes certain proprietary knowledge available (competing firms can imply your risk assessment of an underlyer by finding out what you paid to hedge against it), but a monthly or quarterly snapshot is hardly giving away competitive advantages. It simply squeezes the margins a bit. In return, you get a more transparent market which is good for stabilization of volatility and eases good faith entry of new capital into the system.That itself I agree with, on the principle that a company seeking a reputation as "trustworthy" will fully disclose its books -- not that government should mandate it. All our filings don't disclose our specific research methods, quantitative methods, etc., only that we have $__ in this channel with $__ inflows, etc.

But what I was talking about are trades in financial instruments being made public. If I buy a CDS on company XYZ, why should that be disclosed?

Glad you mentioned those three, Walrus. Very good points about the people looked to for "oversight" and "regulation."

Dodd and Fa, I mean FRANK, are indeed in charge. And they've been well compensated, too! Dodd gets his sweetheart mortgage, and Frank swall, I mean, got campaign contributions from Fannie Mae. I guess that's the liberal version of capitalism?

Now Geithner, good lord...I've said on my own blog that ever since he was nominated, when I heard where he was coming from, I knew he has so much blood on his hands. He was instrumental in precipitating the financial crisis, because while he was the president of the New York Fed, it was his job to do the chairman's bidding on interest rates. The New York Fed is the specific Fed bank that performs open market operations to manipulate interest rates.

It was BS that the markets rallied on the day his nomination was announced. It was the third Friday of the month, when options expire. You almost always have a market rally that day, sometimes early, but by 1 or 2 p.m. if it happens. Geithner's nomination was the first third Friday after Obama's election, and I don't know if it was deliberately timed or just luck, but since then I've noticed "market analyses" giving false credit to this or that on third Fridays.

BTW, did you know that Treasury and Federal Reserve officials are exempt from insider trading laws? It's true.

And Jamie Dimon, head of JP Morgan, also sits on the NY Fed's board of directors. The same NY Fed that gave a sweetheart loan to...JP Morgan...to buy Bear Stearns. Let's assume that he recused himself from any decisions that might benefit him personally or his employer. Any legal counsel in the industry would tell you that the decision is nonetheless tainted.

Perry,

You hit those pitches into the bleacher bum section at Wrigley Field.

The Notorious B.G. can't defend Geithner, or Dodd, or Frank---then again, neither can The Obamessiah.

Therefore,...it's all Sarah Palin's fault !
And blame Fox News, and Israel, too !

Hey, those were easier than when Mike Piazza supposedly sabotaged Roger Clemens in the 2004 All-Star Game! :)