Heidi Moore speaks out!

The agency has been largely openly antagonistic towards Wall Street in the sense that it has insisted on more regulation of derivatives, the Jekyll-and-Hyde financial instruments that are as speculative as they are about reducing risk.

Err, yes love. The producers and consumers get to reduce their risk exposure by unloading it onto the speculators.

That is indeed what it is all about.

The financial crisis showed us that derivatives, which are meant to help investors hedge against risk, are often abused as vehicles of profitable speculation.

My word, did it? I thought it was housing finance that went down the tubes myself. We might extend that to securitisation of housing finance perhaps. But that’s where the problem was. It wasn’t futures or options markets that crashed, was it?

9 thoughts on “Heidi Moore speaks out!”

  1. More Heidi Moore!!! Please Tim, don’t deprive us.

    Funny thing about the sub-prime market: nobody, but nobody since 2008, despite claiming to understanding it all fully and to have “warned” about our impending doom and now claiming vidication, nobody has ever suggested that maybe lending money to really poor people without any income so that they could buy a house and pay it back over many years was perhaps not the cleverest thing we could have done.

    Instead, the SPECULATORS (hiss, boo, erect gallows in our minds) were greedy and stupid to take on that risk. In fact, speculators (foam at mouth like rabid dogs) shouldn’t ever go anywhere near derivatives – presumably then the dust fairy should act as counter-party.

    Am I nuts or does the ‘risk’ stem from the inherent risk in the underlying asset or transaction. And (leaving aside whether I’m nuts or not) the only way to remove that risk would therefore be by outlawing that underlying transaction?

  2. does the ‘risk’ stem from the inherent risk in the underlying asset or transaction.

    It is a major contributor. But then the way the securitisation is structured can magnify, or reduce, that risk for various tranches. One of the problems is that the obscure tefal-head-clevery put in to arranging the securitisation (and the blatant smoke-in-the-eyes for the marketing) meant that far too many people thought they had low-risk tranches and nobody could, in a rush, untangle it to work out what the risk (hence the long-term value) actually was. Hence the market values plummeted and people sold off at the rush, which reduced the market values etc, etc.

    Then a bunch of smart people bought loads up at a few cents on the dollar and will probably be sitting quite pretty (especially for non-US securities) in a few years time when these things start to mature.

  3. @Ironman, you are non-nuts and completely on the right lines but do please note that said greedy boo-hiss speculators have made up their losses out of the taxpayer’s pocket in the meantime. Which contributes to the continued underpricing of risk, and socialisation of losses and privatisation of profits so the whole merry scam can be perpetuated by the financial-government complex forever.

  4. Which is the problem. Free market defences of the financial sector would be valid if it was a free market. With the enormous involvement with government, not least through the hawking of taxpayers’ debt via the bond market, it simply isn’t one.

  5. SE, JamesV & Ian B

    Yes, agreed, in general. I was particualrly taken to find out that the federal gov’t effectively paid most if not all insurance costs follwing Hurricane Katrina – the nationalisation of risk; privatisation of profit.

    However, it’s not always the case. It is delightful to ponder on the hedge funds that copped it when Northern Rock went belly up, or when Lehman crashed or – praise the Good lord – the Co-op lost out when it discovered its bank was rubbish and shareholders do sometimes lose out.

  6. Re: socialisation of losses. If Obamacare goes even more tits-up than it appears to be doing at present and the insurers are screaming then there is an explicit provision in the law to make their losses good out of general funds. In fact it’s even more noisome than that: if they overcharge for premiums they get to keep the excess and if they undercharge they get bailed out. The moral hazard implicit in this should not be too hard to figure out.

  7. @Ironman

    Small investors also lost out. My wife had a Lehman bond as part of a diversified portfolio. So far she has got back 24% of the nominal bond value – last tranche the other week, several years after the collapse. I think that’s probably it now. I think we were fortunate that it was the only investment that really went titsup.

  8. Tractor Gent

    OK, I am not rejoicing in small investors losing out. I would say though that I hope (without the lecturing finger wag, which you don’t deserve) that this was only a small part of your portfolio.

    If it makes you feel better, Ed Miliboy’s games with the energy industry aren’t helping our investment in GridCo.

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