Saturday Morning Open Thread

Abortion rights advocates fill the rotunda of the State Capitol as the Senate neared its vote Friday night (Tamir Kalifa/AP)

Abortion rights advocates fill the rotunda of the State Capitol as the Senate neared its vote Friday night (Tamir Kalifa/AP)

Good Morning Sky Dancers!!

There sure is a lot of news out there for a summer Saturday. Beginning in Texas, the state senate passed a restrictive anti-abortion bill that will threaten women’s lives. The New York Times reports:

AUSTIN, Tex. — The Texas Senate gave final passage on Friday to one of the strictest anti-abortion measures in the country, legislation championed by Gov. Rick Perry, who rallied the Republican-controlled Legislature late last month after a Democratic filibuster blocked the bill and intensified already passionate resistance by abortion-rights supporters.

The bill would ban abortions after 20 weeks of pregnancy and hold abortion clinics to the same standards as hospital-style surgical centers, among other requirements. Its supporters say that the strengthened requirements for the structures and doctors will protect women’s health; opponents argue that the restrictions are actually intended to put financial pressure on the clinics that perform abortions and will force most of them to shut their doors.

Mr. Perry applauded lawmakers for passing the bill, saying “Today the Texas Legislature took its final step in our historic effort to protect life.” Legislators and anti-abortion activists, he said “tirelessly defended our smallest and most vulnerable Texans and future Texans.”

Mr. Perry does not appear to include any “right to life” for adult women in his “effort to protect life,” however. I wonder if anyone has ever asked him one simple question: are women human beings? Forced childbirth is tantamount to slavery in my opinion. Furthermore, childbirth is far more dangerous than abortion, and the restrictions will likely mean that women with problematic late term pregnancies will die or suffer grievous harm. According to the NYT story,

The bill was opposed by many doctors, including leaders of the American Congress of Obstetricians and Gynecologists and the Texas Medical Association; the gynecologists’ group has run advertisements locally that question the scientific underpinnings of the legislation and tell legislators to “Get out of our exam rooms.”

Andrea Grimes writes at RH Reality Check: As Out-Of-State Gawkers Look On, Texas Lawmakers Prepare to Pass ‘Death Sentence’ Anti-Abortion Bill. She describes a young man from Minnesota who traveled down to Texas to watch the show.

This young guy, probably a senior in high school or a freshman in college—I didn’t catch his name—said he was real tired of wearing blue, the chosen color of anti-choice supporters of HB 2. I wore orange that day, the same color as thousands of Texans who have turned up at the capitol to stand up for reproductive rights. I also wore pink earbuds, trying to follow the house debate while waiting in line. Maybe this young guy thought I couldn’t hear him. Maybe he didn’t care.

“I’m looking forward to all this being over so I can wear my orange shirts again!” he joked.

She contrasts his blase attitude with that of Yatzel Sabat, a gay woman of color

who was dragged out of that same gallery Wednesday morning by law enforcement. Sabat was not wearing orange. She was wearing black.

Her limbs bound by state troopers, she screamed in a clear, strong voice, “This bill will kill women!” as the Texas House of Representatives gave its approval to HB 2, passing the devastating legislation along to the state senate for final passage….

This bill will kill. Period.

It will kill Texans who already travel to Mexico to buy abortion pills from flea markets because they are too poor to go to a legal abortion clinic, or unable to take time off work to find a doctor’s office and wait 24 hours between a state-mandated sonogram and an abortion procedure. It will kill Texans who, if HB 2 passes, cannot travel a thousand miles round trip to a San Antonio or Dallas ambulatory surgical center for a safe, legal abortion.

Please read the whole thing if you can.

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Next up, the U.S. Congress debates more cuts in food stamps as American children go hungry. From Martha White at NBC News:

For one in seven Americans, the federal government’s Supplemental Nutrition Assistance Program, aka food stamps, is all that stands between them and too little food.

But the complicated calculus of financial survival for the working poor also means any cuts to the roughly $80 billion SNAP, as it’s known, being considered by Congress would be felt well beyond the grocery checkout line. Buying new school clothes, family outings, even getting a toehold in the financial mainstream could be thrown into limbo.

For many of the working poor, wages just don’t go far enough. The National Employment Law project says nearly 60 percent of jobs created in the post-recession recovery pay $13.83 or less an hour, and hourly wages for some low-wage occupations fell by more than 5 percent in just three years.

Food service and temporary employment make up 43 percent of the post-recession job growth, according to NELP policy analyst Jack Temple. “They overwhelmingly pay low wages,” Temple said. “For that lower segment, you’re going to see increased use of safety net programs to make up the difference.”

Read it and weep, folks; and while you do keep in mind that the Federal deficit has been dropping steadily. The only possible reasons for the austerity agenda are to make the rich richer and punish the working poor.

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The Snowden saga continues.  Reuters reports that Russia has not yet received an application for asylum from the American hacker/leaker/whistleblower/dissident–or whatever he’s being called at the moment.

Russia kept former U.S. spy agency contractor Edward Snowden at arm’s length on Saturday, saying it had not been in touch with the fugitive American and had not yet received a formal request for political asylum.

Remarks by Foreign Minister Sergei Lavrov signaled Russia is weighing its options after Snowden, who is stranded at a Moscow airport, broke three weeks of silence and asked for refuge in Russia until he can secure safe passage to Latin America.

Washington urged Moscow to return Snowden to the United States, where he is wanted on espionage charges after revealing details of secret surveillance programs, and President Barack Obama spoke by phone with Russian President Vladimir Putin….

“We are not in contact with Snowden,” Russian news agencies quoted Lavrov as saying in Kyrgyzstan, where he attended a foreign ministers’ meeting.

He said he had learned of Snowden’s meeting with Russian human rights activists and public figures at the airport on Friday from the media, “just like everyone else.”

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Senator Elizabeth Warren is working on bringing back Glass-Steagall-like regulations on banks. From the LA Times:

Sen. Elizabeth Warren has launched a campaign to make banks boring again as she pushes legislation to enact stricter regulations forcing deposit-taking financial institutions out of the investment business.

The Massachusetts Democrat wants to reinstate the Depression-era Glass-Steagall law, which separated what she called boring checking and savings accounts that are backed by the Federal Deposit Insurance Corp. from risky investment banking.

And after joining three other senators Thursday in introducing a bipartisan bill to do that, Warren went toTwitter to rally support.

She urged her Twitter followers to retweet the message, “Banks should be boring.” She emailed her political backers, asking them to support her 21st century Glass-Steagall Act, which she introduced along with Sens. John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine).

Yesterday Warren went on CNBC to argue her case with some blonde talking head. Check it out:

As you know, yesterday Malala Yousafzai spoke to the United Nations and told the world: Being shot by Taliban made me stronger (NBC News)

Malala Yousafzai addresses the UN

Malala Yousafzai, the Pakistani teenager shot in the head by the Taliban for campaigning for girls’ education, was given a standing ovation at the United Nations Friday as she declared the attempt on her life had only given her strength and banished any fear she once felt.

“Dear friends, on the 9th of October, 2012, the Taliban shot me on the left side of my forehead. They shot my friends too,” she said in her first major public appearance. “They thought that the bullets would silence us, but they failed.”

Speaking on her 16th birthday, she said the “terrorists thought that they would change my aims and stop my ambitions, but nothing changed in my life except this — weakness, fear and hopelessness died, strength, power and courage was born.”

“I am the same Malala, my ambitions are the same, my hopes are the same and my dreams are the same,” she said to thunderous applause.

What an courageous, intelligent, and inspiring and young woman she is!

On that note, I’ll turn the floor over to you. What stories are you following today. Please post your links on any topic in the comment thread. Have a stupendous Saturday


Derivatives – The Dark Market

[Dakinikat here:  We at Sky Dancing would like welcome fiscalliberal to the Front page!!!]

The major objective of this article is to begin the process of understanding the financial market to enable intelligent discussion on the blog.

One of the major pillars of financial collapse was Derivatives. They are very complex financial instruments with a wide diversity. They are described by a gaggle of terminology used by the high priests of finance. Because of complexity most of the books on the collapse skirt the detail of the Derivative Market. After we get through some basic definitions, we will focus on Credit Default Swaps (CDS); a subset of the Derivatives offerings. We will see how the government created a non regulated environment where fraud, compromised regulators and incompetent people ran the Investment Financial community in a very high risk mode.

Derivatives Defined

A Derivative is a financial instrument whose value is dependent on the value of another entity at a future time. Its primary function is to mitigate risk. A simple analogy would be your Home insurance. These policies guarantee that you will be remunerated if the value of your home falls due to fire, wind, or accident.  A relatively small premium of money can mitigate a large potential financial catastrophe. State regulators are in charge of most regular Insurance products and solvency is less of an issue as adequate capital reserves are defined.

We need to think of Derivatives as a “risk tool” meant to stabilize the financial businesses (markets). The wide variety of Derivatives creates confusion, so we are going to restrict our discussion to Credit Default Swaps (CDS).   Anticipating problems with Sub Prime mortgages, Securities were insured by investors. It was the Credit Default Swaps inability to perform that was a party to the financial collapse after the Lehman bankruptcy. They did not have the financial reserves to back up the policies they wrote How did that happen?

Deregulation

For our discussion today, three government deregulation actions are relevant.

  • 1999 Graham Leach Bliley Act repealed the 1933 Glass Steagall act. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.
  • April 28, 2004 SEC drastically relaxed leverage standards for the Big Five Investment Banks: Goldman, Merrill, Bear, Lehman and Morgan Stanly. This created a very high risk environment.  The session can be viewed here.

Financial self regulation brought the system down in 8 years. Bush de-funded Federal regulation. Greed, incompetence and corruption reigned supreme. Enron people went to jail. As of 2010, under Obama only bit players have been jailed. Civil fines are a joke.

Securitization Market

We need to understand the environment created by the above regulation changes  to understand the role of CDS Derivative failure. We will concentrate on the Real Estate Industry

Traditionally, according to HBSwiss, the real estate industry was handled by local banks who retained the loans. Their exposure to losses resulted in more careful origination of loans. For a long time, Fannie, Freddie and FHA were packaging (securitizing) mortgages and selling them to Investors. They enjoyed a good reputation because they had good loan origination standards. These were categorized as Prime mortgages. Generally these securities obtained a AAA rating which rarely changed. Good consistent returns were recorded with these products.

Early in the 2000 decade the Investment banks adopted the securitization model called Private Label Securities. They purchased their mortgages from unregulated brokers (Country Wide, Ameriquest etc) who had little or no standards regarding underwriting of loans. The private label market latched on to the fact that high risk “Sub Prime”  loans carried higher interest rates, hence higher profits. They had no exposure to the failure of the loan as risk was passed on to the Investors. They simply collected the lucrative fee’s.

Investment Banks packaged the loans (millions and billion level). They paid the rating agencies (S&P. Moody and Fitch) for ratings structuring the packages to get AAA ratings. It is clear the rating agencies did not do their job as traditionally solid AAA ratings were changed as the packages started to fail. These packages were sold to the domestic and world markets. Trillions of dollars were involved. The banks simply passed the risk on to the investors and collected the origination and servicing fee’s

CDS Market

Risk could be mitigated by purchasing a CDS against the failure of the security. So if the security failed the investor was held harmless. Remember that as of 2000 the CDS  market was unregulated. AIG – London Financial Services is the poster child of the CDS industry. AIG wrote most of the CDS contracts cheaply as they held inadequate reserves (in the event of a default) and had a good company rating based on the parent insurance company whose operations were regulated. Office of Thrift Supervision was the responsible regulator, but their presence was effectively non existent, Goldman Sachs (Hank Paulson as CEO) was one of their major clients.

However, late 2006 / 2007 AIG FP realized they were over exposed and got out of the market retaining the previous contracts. Recall in the unregulated market anyone could write CDS and the big banks did. As the Mortgage Backed Securities began to fail, the banks started writing CDS between the banks to mitigate risk always falsely believing the market would recover. This was necessary because When Bear and Lehman started to fail the banks were joined at the hip, guaranteeing each others toxic securities. Based on the 2004 SEC relaxing reserve requirements, that banks were leveraged up and things were starting to fail. In a leveraged market things get serious to critical in a matter of hours.

The daily, weekly and monthly credit markets froze up because nobody trusted anybody. Even GE was having trouble borrowing for daily operations. Andrew Ross Sorkin’s book‘Too Big to Fail’— gives a good account of the scenario in 2008. Fannie and Freddie were in conservator ship, near bankruptcy Bear was bought on a fire sale by JP Morgan, Lehman was bankrupt, Merrill near bankruptcy was bought by Bank Of America and AIG had to be rescued by the Federal Government. Morgan Stanly and Goldman were within days of bankruptcy, but got bailed out by Warren Buffet and a Korean financial entity.

The AIG story is discussed in this newspaper article ‘Behind Insurer’s Crisis, Blind Eye to a Web of Risk’.

It is interesting to know that just before the 2008 collapse, the rating agencies down graded AIG forcing them to hold more reserves. They were forced to raise cash in a collapsing market.  In a high leverage industry, when it rains it pours.

Naked CDS

Investors can buy CDS on securities even though they do not own the security. This is equivalent to a neighbor buying insurance on your house. So if you know that a Mortgage Backed Security has a lot of high risk loans in it and is headed to failure, you buy a CDS anticipating the default. Michael Lewis’ book‘The Big Short’–is all about the people who anticipated the failures and bought CDS products. A Bloomberg video interviews Lewis and it provides a lot of insight into the mess that evolved.

I look to Dakinkat, Gillian Tett, Yves Smith, and Janet Tavakoli on technical issues of Derivatives. Lewis’ forte is being able to write to the general public. His book gives a lot of insight to the CDS market nuances. It is interesting that Smith and Tavakoli consider Lewis to be a light weight. Yet, his book sales exceed theirs.

To get a notion of the size of the CDS market we need to look at these numbers. The size of our national economy this year is roughly $15 trillion. The whole world GDP is about $56 trillion. At the time of the 2008 failure, the size of the Credit Default Swaps (CDS) market was $64 trillion. The exposure at the time of the collapse was huge. The magnitude of the Naked CDS is not known, but is understood to be huge.

Given that the unregulated CDS underwriters were prone to not provide adequate capital reserves for defaults, there was a massive liquidity problem, hence the government had to step in and bail out the likes of AIG and banks who wrote these products.

The whole CDS market is described as being part of the Casino Gambling image in the financial markets

Current Status

The Dodd Frank Bill has a moderate approach for Derivatives Regulation. However it is up to the regulators for implementation and the banks are attempting to minimize the impact of regulation. This is documented by two recent NYT articles.

It’s Not Over Until It’s in the Rules

A Secretive Banking Elite Rules Trading in Derivatives

A short summary of the above articles is that the big banks are attempting to save their Oligopoly through the Risk Committees of the Clearing Houses. This is being done by imposing high capital reserve requirements for participants. This has the effect of limiting competition which limits price competition and transparency. The elephant in the room is the risk committee’s saying certain derivatives are to complex to be cleared. This gets us right back to where we were in the financial crisis. Over the Counter non clearing house products are the most profitable and open to risk.

In the spirit of Brooksly Born regulation, It has been proposed that Derivatives be run using a Clearing House or a Exchange Trading Requirement.

From The Economist:

Clearing House: A clearing requirement is a requirement that all eligible derivatives be cleared on a central clearinghouse (also known as a central counterparty, or CCP). A clearinghouse provides critical counterparty risk mitigation by mutualizing the losses from a clearing member’s failure, netting clearing members’ trades out every day, and requiring that parties post collateral every day. Clearinghouses also centralize trade reporting, and can provide any level of post-trade transparency to the OTC derivatives markets that your heart desires — same-day trade reporting, including prices, aggregate and counterparty-level position data, etc. Virtually all of the harmful opacity and murkiness of the current OTC derivatives markets can be ended with just a clearing requirement — that is, a clearing requirement is a prerequisite for getting rid of the harmful opacity in OTC derivatives

Exchange Trading: An exchange-trading requirement, on the other hand, is simply a requirement that all eligible derivatives use a particular type of trade execution venue: exchanges (also known as “boards of trade”)..The exchange is just the trade execution venue (think NYSE vs. Nasdaq). The only thing that an exchange-trading requirement adds to the clearing requirement is “pre-trade price transparency.”

The clearing house is obviously the better because it brings a degree of financial integrity and transparency. It certainly is the more expensive of the options, but its cost  is minuscule when we think of the financial collapse.

However based on the articles above, it is clear that the big bankers are attempting to preserve their oligopoly in terms of the CDS market. They also want to preserve the option to take the market back to the opaque high risk environment because of profit opportunities.  The Opaque Over the Counter market is the biggest threat to the stability of the market

In Dodd – Frank, the CFTC and SEC have co-jurisdiction The CFTC commission seems to be moving to the bankers view. SEC has been relatively quiet on this subject

We need to remember that Mary Schapiro (SEC)  and Gary Gensler (CFTC) were part of the problem before the 2008 Financial Crisis. It remains to be seen how well they address the problem. Will they do the right thing or are they financial industry moles?