Monday, April 19, 2010

Air Of Sophistication

SARBANES: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast growing market remain real. How do you respond to these concerns?

BERNANKE: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced, and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

-Senate Banking Committee hearing to confirm Ben Bernanke as Alan Greenspan's successor, November 2005

[T]he increasing prominence of hedge funds and the growth of the market for credit derivatives are both aspects of the remarkable wave of financial innovation that we have seen in recent years. Both of these developments have also been the subject of public policy debates, including calls for increased regulation. ... The increasing sophistication and depth of financial markets promote economic growth by allocating capital where it can be most productive. ...
[M]arket discipline can be an important element in a well-functioning regulatory scheme. ... Some complex instruments can be valued only with the aid of sophisticated modeling techniques. The problems of valuation and of risk measurement faced by investors in tranches of bespoke collateralized debt obligations (CDOs) are a good example.

-Ben Bernanke, May 15, 2007, less than four months after the below email was sent.

"More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab[rice Tourre]...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"

-Email in January 2007 from Fabrice Tourre, the Goldman Sachs executive charged last week with derivatives/CDO-related fraud, from page 7 of the SEC complaint.


Blogger Bill Bennett said...

Given the "expertise" espoused by his quotes, one wonders how this ever ended up in print.

Roger Lowenstein, NY Times Jan. 20, 2008 "The Education of Ben Bernanke"

"Although he knew the experience of the 1930s in his sleep, he was, in truth, unfamiliar with the exotic mortgage instruments that were failing now. Bernanke has no ego about such matters, and he consulted extensively with Timothy Geithner, the president of the New York Fed, as well as with Kevin Warsh, a fast-rising 37-year-old Fed governor and former investment banker at Morgan Stanley, whose unofficial role is to keep tabs on Wall Street".

4/19/2010 4:49 PM  
Anonymous KAIMU said...


Here's the Maestro of low rates and bubbles ...

In Congressional testimony on October 23, 2008, Greenspan acknowledged that he was "partially" wrong in opposing regulation and stated "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity — myself especially — are in a state of shocked disbelief."[36] Referring to his free-market ideology, Greenspan said: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Rep. Henry Waxman (D-CA) then pressed him to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Waxman said. “Absolutely, precisely,” Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”[64] Greenspan admitted fault[65] in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.

Who is shocked?

Why do we even waste time trusting the US FED? Where does their fiduciary duty lie or do they just plain lie?

4/20/2010 4:40 AM  
Anonymous Anonymous said...

The "financial innovation" Bernanke mentions sounds less like "allocating capital where it can be most productive" and more like unregulated gambling.

Also, why were firms allowed effectively to "insure" against risks without being regulated as insurers?


4/20/2010 10:07 AM  
Anonymous Anonymous said...

I am not an investor, so I don't have the credentials to comment here, but I don't get it, I mean, I really don't get how Goldman Sachs stocks could double in value while the company is being sued for fraud.

Are investors hoping Goldman Sachs will now clean up their act now, or do investors invest in firms who are willing to ignore/bend/break rules to make high profits?

4/20/2010 11:39 AM  
Anonymous Anonymous said...

11:39 anon

You aren't supposed to get it. This is something for them to shuffle money around and make money on deals while passing out the risk to as many as possible to make it harder for the risk to be parceled out. Basically they want it to be so complicated that no one (including them I sometimes think). They can reply to the few questions they get with these are for "traded among very sophisticated financial institutions and individuals" which makes them sound better/more real than they are.

Listening to some high finance guys is not different than listening to the militia/conspiracy types. They have their own very tiny universe that uses it's own form of English but is so idiosyncratic that you have to know the universe and it's history to actually understand what they are alluding to. Otherwise it really is just gibberish.

4/20/2010 4:06 PM  
Blogger Unknown said...

"Think about it...Goldman Sachs, on the deals they're talking about, was dealing with the most sophisticated people in the business." - Orrin Hatch on Fox News, via Countdown with Keith Olbermann, 4/20/2010

4/21/2010 10:03 AM  
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