This why I still believe...

that they knew about this "crisis" coming down the pike at least as far back as 2003 when they were using that obscure civil war era banking law to block the state lawsuits against the banking institutions. They knew this was all coming and they needed to get legislation in place that would protect the lifestyles of their rich and blameless allies.

"It turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties [like CDS holders] at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors."" - Josh Marshall

Legislation like that doesn't just come out of nowhere.

It takes time for them to figure out what they want to achieve and how they want to achieve it. And then there is the need to find the right time and the right place to slip the junk in.

They could have solved many of these problems years ago and mitigated some of the disastrous results but, instead, they purposefully let it build while protecting themselves and waited for just the right time to unleash the "crisis" on the nation, knowing it would tie the hands of the next administration financially.

IOW: They did manage to drown the government in a Katrina sized bath tub.

Also, I think they were hoping the GOP could capitalize on it politically during the elections. What they didn't count on was John McCain's doe in the headlights reaction looking as stupid as it did, nor the fact that some would figure out how it all really happened so fast that a huge backlash would ensue coupled with the reality that Americans just don't trust republicans with their money anymore and in any way. The GOP is a walking and talking financial zombie.

This was all nothing more than a well orchestrated game of CYA and collusion between politicians and their financial owners. Real, honest "Disaster Capitalism" in an ufetterred free-market-run-amok at its worst.

 [So I was wrong. Clearly edited to reflect less "DUH".]

 

 

 

 

 
 
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I'm not quite sure I agree entirely with the commenter that gave Josh the tip but good info to have.

of what luaptifer was honing in on. The more I find out about all of this, the more I believe that this is true. Lambert had some comments on this which generated this response, because I was not really sure he realizes just how far back knowledge of this "crisis" goes? I know that I was shocked when I first read Luapt's diary as the crisis was unleashed.

at least to the financial/economic blogs.  They have been covering this before it became a crisis. 

That are learning on the fly out of necessity. See my comment below to Chris. I really feel completely ignorant when I read some of the stuff out there. lol

I agree that there has been a barefaced imperialist looting operation going on, on behalf of the almighty sovereign dollar and the 1% who have been creaming the economy, (amd it sometimes looks like a  giant crap shoot where the house wins in the end) but I think that the systen has in fact gone out of control (ie the suckers and the house are going to loose in the end unless the casino is put out of business when everyone finds out there is no money behind the chips. ). I don't think that some "they" planned things to be this way because and are going to come out big winners, because I do not think they can hold the system together the way things are going. There is a financial meltdown going on and it is going to leave a lot of metaprhorical dead bodies in its wake.

It seems to me that in the process America's imperialist ambitions are in process of receiving a serious setback.

Please don't get me wrong. For sure there are  gangd of thieves out there who have been running the rapacious US economy as a giant ponzi scheme but I think they have in fact created  a Frankenstein's monster. Now the monster that Frankenstein created was a pretty scary creature killing the good guys along with the bad, but he was an out of control monster.

Anyway I am always kind of doubtful of conspiracy theories. They attribute much to much more  intelligence and competence to the bad guys than I think is warranted.

carol

I think they knew they weren't going to win here. They knew the collapse was coming and engineered the situation to keep whatever they could. They were looking at losing one bank after another. The point of it would be to position themselves to restrict their losses by passing them off on us as much as they possibly could. And abusing their failures to limit any movement by the left on social safety nets. Maybe even destroy those social safety nets as a bonus.

For them, winning was stopping their slide at being millionaires and billionaires, at the very least. Not as rich as they were as the multi-millionaires and multi billionaires that they were in this imaginary growth market that they used to "manufacture" non-existant money.

If they had not engineered all of this they would have been left bankrupt and with less than ZERO. And having none of their buddies to turn to because they would have almost all been left penniless. Someone can correct me if I am wrong here, but we are talking about amounts of money that are greater then our yearly GDP. And they would have lost it all.

Does that make sense?

Remember when Judy Garland and the rest of her gang peek behind the curtain to finally confront the wizard and what they see is an unimpressive little guy who certainly is no wizard. I think if there is ever a remake that seen will be played so that when the curtain is drawn what's behind it is revealed to be a computer. Just like the little man, the so-called Wizard, was really a phony, so to is the much-vaunted financial expertise of these guys who aspired to run/loot the world. I think their mentality is no different that Bernie Madoff's mentality. W. C. Fields had the immortal line, "There's a sucker born every minute." (at least that's how I remember it) I doubt very much there was a master plan. Isn't it a truism of gangster movies that the thieves always fall out and end up ratting on each other. That's how I see it. Not very pretty, but not so smart either.

carol

who said "There's a sucker born every minute." Circus sideshows and all that.

But then I think it was picked up elsewhere. I do remember W.C. Fields using it but can't place the context.

carol

On the law per se. There was a discussion at "Columbia Law and Economics Working Papers".

Here's a link to an abstract of one of the articles. It reads in part:

The expanded definitions - especially the definition of “swap agreement” - are now so broad that nearly every derivative contract is subject to the Code’s protection. Instead of protecting particular counterparties to particular transactions, the Code now protects any counterparty to any derivative contract. Entire markets have been insulated from the costs of a bankruptcy filing by a financial contract counterparty. Equally important, the amendments limit judicial discretion to assess the economic substance of financial transactions, even those that resemble ordinary loans or that retire a debtor’s outstanding debt or equity. The reforms of 2005 direct judges to apply a formalistic inquiry based on industry custom: a financial transaction is a “swap,” “repurchase transaction,” or other protected transaction if it is treated as such in the relevant financial market.

There are other abstracts available through the links on the right. I don't know how you feel about it, but I am not going to pay to access the full discussion!

on this one.  They may have taken advantage of some parts of the crisis but there are other problems with the Republican vs. Democratic theory here.  Yes, some parties (or counterparties to be exact) appear to have received preferential treatment here but the real culprit is more in economic theory or idealogy.  The free market economic theory that has been in place for the last couple of decades is more to blame here.  It's true that more Republicans subscribe to the free market theory.  But it was the free market push to deregulate and assume too much risk plus a monetary policy that helped by creating a cheap money supply that led up to where we find ourselves today. 

And another problem you will run into with putting too much emphasis on the party politics here is that the financial industry, especially Goldman Sachs, were really behind Obama.  

This probably should be directed more towards "money party and people party" politics. Dagnabit, you have good aim!

to the heart of the matter, the need for publicly funded elections.  I think the best chance of us getting our democracy back is to change the election laws so we can elect people who don't owe their office to the contributions of any outside interest.

I linked to Josh Marshall's retrospective from Naked Capitalism this morning. Read the article and then went back and read Yves Smith's review of Taleb's book on the Black Swan.

I thought the "Black Swan" question to be of much more lasting interest than Josh Marshall's piece. This is the reason. Taleb has put a lot of work into discrediting both the "efficient market hypothesis" (the idea that everything is already priced in) and the "Black Scholes Merton" Equation which was cooked up in 1973 as a way of pricing options. The "Black Scholes" option pricing equation underlies the development of derivatives from futures, options and index futures. They were reviving, in a more formal way, knowledge which had been junked when Roosevelt shut down those kinds of speculative activities.

In other locations Taleb, who, Smith reports, worked with Mandelbrot of fractals fame, showed that the thinking which underlies "Black Scholes Merton" was not original to them, traces back to the work of a Frenchmen called Bachelier in 1902, is referenced in the early 1920's work of Keynes, and was part of the practical trading knowledge of all kinds of specialists in many different ways.

But, Taleb has also put a lot of effort into arguing and publishing his view that the Black Scholes pricing system, which is found at the root of the computer driven programs which supposedly require financial engineers who can handle the math, doesn't work, because it eliminates too much from consideration. Thus, there have been efforts to reconcile Black Scholes with the "Fat tails" of Gaussian distributions (catastrophe theory), and the work of David X. Li (absence of empirical pricing data), which I mentioned in that piece on Humpty Dumpty and Citibank a few days ago, as well as others.

Black and Merton (Scholes died in 1993) went on to found the hedge fund Long Term Capital Management with Meriwether from Salomon Brothers (I think Scholes also worked at Salomon). It was lucky for them (Black and Scholes) that they got their Nobel prize in 1997. If the committee had waited till 1998 they probably wouldn't have got the prize, because LTCM, as I'm sure you know, collapsed in one of the most spectacular bankruptcies ever in the fall of 1998, and nearly took the US financial system down with it.

That hasn't stopped Scholes who set up another Connecticut-based hedge fund to do what LTCM did, and is now under investigation, or indictment, for  using off-shore vehicles associated with his fund for tax evasion.

Anyway, I'm just writing this to say that if the "theory" doesn't work, it must be a pretty strange conspiracy. How could they do anything for reasons other than reacting to something in the short term? It isn't just that the theory has consequences for others. It has had repeated and disastrous consequences for its authors themselves and their lives.

I can think of short term reasons why people might have wanted to change bankruptcy law to protect what they thought they were doing.

But I do think, that if one thinks rationally about the whole business, and doesn't get swept away with the outrageousness of it all, which admittedly is quite difficult, one has to concede, at some point, that these people who do these things, and cook up this stuff, must be quite, quite mad. I can begin to think what a conspiracy of lunatics might look like, but it is as hard to imagine such a conspiracy leading to purposive or deliberately adopted outcomes by way of means which wilfully correspond to the adopted ends, as it is to imagine a nutter knowing what he is doing.That doesn't exclude people thinking they know what they are doing. Nor does it prevent them thinking they have an agreement on what they are doing, but what they all might think that agreement is, would be a variable function perhaps comparable to a random walk if not the chimps typing Shakespeare.

An example, I think, might be found in the story and movie "A Beautiful Mind."

Of course, it is also hard to reconcile "mathematics" and "mathematical ideas" with what is often thought to be "doing things" or "being practical", or with the usual kind of motivations people attribute to excess in areas which involve money, i.e greed and the appetites a ready supply of money can satisfy. That's a different subject though.

 

 

That about 90% of what you wrote there went directly over my head. EEEP! lol This what makes trying to figure out the real problems in this so frustrating for the average person.

"Black Scholes Merton" Equation?

reconcile Black Scholes with the "Fat tails" of Gaussian distributions?

So many of us are learning about stuff that we never cared to learn about, but now we must try. And it is like we all need a new or different course in economics, business, banking and investing to get a clear picture of what some posts are talking about. You probably just added another couple of days worth of reading for myself in order to begin to understand that comment.

This was originally published here on the 4th September 2007 with the title "How To Price Tail", but the headline was thought to be a bit offensive for some reason. Anyway it deals with the question of pricing tail in relation to catastrophe insurance.

and I can easily see why the title might seem offensive regardless of alternate financial meanings. lol

The next thing we know you'll be dissing "fat tails" too ;-)