Credit Default Swaps, Idiots in Congress, Enron and Phil Gramm

[Oldbabe]

This article lays out how the "Commodities Futures Modernization Act that exempted from regulation energy trading on electronic platforms," which Phil Gramm and McCain both supported. Gramm's wife served on Enron's board of directors. Now we all know how Enron, "freed from regulatory interference. . .then used manipulative trading practices to game the California electricity market and drive up electricity prices across the states at the time."
McCain Defends 'Enron Loophole' | BaltimoreChronicle.com

The Commodities Futures Modernization Act is what allowed financial firms to sell credit default swaps (CDS), which were illegal before the Act was passed in 2000. Almost ALL congresspeople voted to pass it, Dems and Reps alike. Idiots! GovTrack: House Vote On Passage: H.R. 4541 [106th]: Commodity Futures Modernization Act of 2000

But it was Phil Gramm who initiated the Act, just after Bush was elected in 2000.
"A few days after the Supreme Court made George W. Bush president in 2000, Gramm stuck something called the Commodity Futures Modernization Act into the budget bill. Nobody knew that the Texas senator was slipping America a 262 page poison pill. The Gramm Guts America Act was designed to keep regulators from controlling new financial tools described as credit "swaps." These are instruments like sub-prime mortgages bundled up and sold as securities. Under the Gramm law, neither the SEC nor the Commodities Futures Trading Commission (CFTC) were able to examine financial institutions like hedge funds or investment banks to guarantee they had the assets necessary to cover losses they were guaranteeing."
James Moore: A Nation of Village Idiots

There was a good story about these CDS's on 60 minutes tonight. You might be able to access it on the web later or tomorrow. They, the CDS, are the reason we are in this economic disaster.

Subprime mortgages were the vehicle that the financial companies used to make credit default swaps and, therefore, bankrupt themselves. But apparently, several hedge fund managers have made like 100 billion on their bets.

[FIRE'd@51]

Quote:

Originally Posted by Oldbabe The Commodities Futures Modernization Act is what allowed financial firms to sell credit default swaps (CDS), which were illegal before the Act was passed in 2000.

Actually, this is incorrect. CDS existed before 2000 and were perfectly legal. What the Gramm provision did was to prevent regulation of these instruments (as the cut & paste section of your post clearly states.)

[chinaco]

Phil Gramm is a piece of work. When he was legislator... he was a blight on America. There is little doubt whose interests he was protecting. And it was not the American people.

FIRE'd@51... you post the correction... Thanks for that. But what is your point? You feel some need to defend Phil Gramm? I hope not... defending wrong-headed Republicans just continues the problem. Most of the Republican party had better distance themselves from him... he is a pariah.

I am absolutely shocked that John McCain pick him as an economic adviser. In a way it shows how disconnected John is from the average American's economic needs. And I do not think John is a bad guy... but I am not voting for him. I would have voted for him in 2000... but not now.

[FIRE'd@51]

Quote:

Originally Posted by chinaco FIRE'd@51... you post the correction... Thanks for that. But what is your point? You feel some need to defend Phil Gramm?

I'm not defending Gramm. I was simply pointing out a stated piece of misinformation. After all, we do want to get our facts right, don't we?

[youbet]

Quote:

Commodity Futures Modernization Act of 2000 The Commodity Futures Modernization Act of 2000 or CFMA, was passed and signed by President William Jefferson Clinton in December 2000 in large part to allow for the creation of U.S. exchanges for the listing of a new sort of derivative security, the single-stock future.

NationMaster - Encyclopedia: Commodity Futures Modernization Act of 2000

[FIRE'd@51]

My guess is that WJC was probably too busy getting together his list of Presidential pardons to be concerned with what was actually in the legislation he was signing.

[youbet]

Quote:

Originally Posted by FIRE'd@51 My guess is that WJC was probably too busy getting together his list of Presidential pardons to be concerned with what was actually in the legislation he was signing.

While there could be some truth to that..... A little googling and reading shows that WJC was well aware of what he was signing, was not forced into anything and even today defends his signature on the Bill.

That doesn't change who the originators were or any thing else about the Bill. It's just interesting how WJC is conveniently forgotten in discussions about the CFMA by partisan folks.

[Oldbabe]

Looks like the 60 minutes story on CDS confused (misled?) me:

"It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.

It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea."

"It's legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell," Dinallo says.

"I mean it sounds a little like a bookie operation," Kroft comments.

"Yes, and it used to be illegal. It was very illegal 100 years ago," Dinallo says.


The Bet That Blew Up Wall Street, Steve Kroft On Credit Default Swaps And Their Central Role In The Unfolding Economic Crisis - CBS News

[youbet]

The statements quoted in Oldbabe's post above would make it clear why Bill Clinton would support CFMA! "gambling" "bookie" "no controls" "play sax while USA burns" "smoke a little dope but don't inhale" Take a BJ break while on the job" ...... all seems to fit together......

[audreyh1]

Quote:

Originally Posted by FIRE'd@51 My guess is that WJC was probably too busy getting together his list of Presidential pardons to be concerned with what was actually in the legislation he was signing.

Didn't matter - it passed by 87% in the House. I imagine it had similar stats in Congress.
GovTrack: House Vote On Passage: H.R. 4541 [106th]: Commodity Futures Modernization Act of 2000

[youbet]

Quote:

Originally Posted by audreyh1 Didn't matter

Other than to his legacy...... He could have veto'd (of course, this assumes he was against the Bill, which he wasn't) and left it for override passage or for Bush to sign.

But your point is well taken. The Bill passed with huge bi-partisan support and Bill's willing signature. Amazing how popular it was!

[clifp]

Quote:

Originally Posted by Oldbabe Looks like the 60 minutes story on CDS confused (misled?) me: "It's a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages. It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea." "It's legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell," Dinallo says. "I mean it sounds a little like a bookie operation," Kroft comments. "Yes, and it used to be illegal. It was very illegal 100 years ago," Dinallo says. The Bet That Blew Up Wall Street, Steve Kroft On Credit Default Swaps And Their Central Role In The Unfolding Economic Crisis - CBS News

FWIW, they confused/mislead me also.

I do wonder if things like CDS were actually illegal for the last 100 years. I've read they have actually been around since the 1990s. I'm waiting for the WSJ, or Forbes to publish a reaction to the 60 Minutes.

I am sympathetic to the Wall St. firms in one area. The 60 Minutes piece made a big deal how the 2000 legislation prohibited states from regulating CDS. In theory each state is suppose to have the equivalent of the SEC, in reality virtually no state other than New York, is capable or interested in providing regulations for securities. I can't imagine in Hawaii they could find people who were both competent to regulate CDS and willing to get paid as low level civil servant. I am not even sure it makes sense to have insurance companies regulated at a state level, since the insurance commissioner is often a political apointee. But it is silly to make brokerage and investment banks have to conform to 50 different state laws. We would be better of centralizing the regulator function in the SEC.

[. . . Yrs to Go]

Quote:

Originally Posted by Oldbabe Subprime mortgages were the vehicle that the financial companies used to make credit default swaps and, therefore, bankrupt themselves. But apparently, several hedge fund managers have made like 100 billion on their bets.

Two different things, two different problems. One compounds the other.

Large subprime mortgage exposure has threatened the solvency of certain financial institutions.

Large counterparty credit exposure among financial institutions through CDS makes the insolvency of one a potential threat to all (or many).

[. . . Yrs to Go]

Quote:

Originally Posted by clifp The 60 Minutes piece made a big deal how the 2000 legislation prohibited states from regulating CDS.

CDS isn't really insurance any more than a put or a call is. We shouldn't have it regulated by the insurance commission and we really, really, really, shouldn't have it regulated at the state level. Moving CDS trading from the over-the-counter market to an exchange (something broker dealers have vigorously opposed, until now) is sufficient to fix the problem with CDS. Rest assured that this will happen. And when it does, CDS will become as vanilla as any other exchange traded security.

[audreyh1]

Quote:

Originally Posted by . . . Yrs to Go Two different things, two different problems. One compounds the other. Large subprime mortgage exposure has threatened the solvency of certain financial institutions. Large counterparty credit exposure among financial institutions through CDS makes the insolvency of one a potential threat to all (or many).

It seems to me that it was really the excessive leverage that made all of this so risky. Yes, the other stuff was a mess too. But if there hadn't been such extreme leverage, perhaps the rest of the mess would have been survivable without causing a collapse of the financial system?

[. . . Yrs to Go]

Quote:

Originally Posted by audreyh1 It seems to me that it was really the excessive leverage that made all of this so risky. Yes, the other stuff was a mess too. But if there hadn't been such extreme leverage, perhaps the rest of the mess would have been survivable without causing a collapse of the financial system?

Yup . . .and that applies to just about everything from houses to hedge funds.

[clifp]

Quote:

Originally Posted by . . . Yrs to Go CDS isn't really insurance any more than a put or a call is. We shouldn't have it regulated by the insurance commission and we really, really, really, shouldn't have it regulated at the state level. Moving CDS trading from the over-the-counter market to an exchange (something broker dealers have vigorously opposed, until now) is sufficient to fix the problem with CDS. Rest assured that this will happen. And when it does, CDS will become as vanilla as any other exchange traded security.

'

I think you are right. Having CDS traded on exchange would the reduced the uncertainty and fear associated with this products and would have given greater visibility to management and regularity.
It would be stupid to have them regulated by the states. But that was one of the criticism of Commodities Future act by 60 Minutes.

I am not as optimistic as you that with Democrats firmly in control, everybody running for cover, plus Congress attempting to pass blame,that your sensible solution will come to pass.

I'd like to see trading in a new type of CDS. Congressional Dipshit Swaps this would be insurance policies against Congress doing dumb things and would help mitigate the cost of their policy. I am sure they would quickly turn into a multi trillion dollar market.

[chinaco]

The 60 minutes piece about CDS was interesting. We learned a hard lesson again. The legislators signed this bill at the end of of 2000 apparently the Commodity Futures Modernize Act. The rationale was that it would move overseas. Greenspan endorsed it and his endorsement was good enough for some legislators.


Consider the recent energy/commodity bubble that was occurring. We all got ripped off by a run up in gas prices and other petroleum products merely because speculators were manipulating future (running them up). No way on earth demand had increased to double prices! Phil Gramm was the hatchet man that pushed for this provision in the senate (Enron loophole). http://books.google.com/books?id=d3S...esult#PPA99,M1


It is obvious that most (perhaps all) legislators signed this bill without understanding the potential problem. Most politicians would not sign this type of legislation if they knew there was a reasonable chance this crisis would occur. They were deceived and led down the path by several powerful business institutions (i.e., lobbiest) that thought they would be smarter than others and make a killing... the only thing that got killed was Investors, Average Americans, The American Economy and all of our retirement savings.

It is very sad that we are experiencing what happened in the early 1900s because of people compromising the integrity of the system for personal gain.

This thing is not over. We (small investors) could be financially ruined (all of us). There is more than a remote chance that many (non-financial) companies could fail as a side effect. The US Government cannot bail them all out. Anyone who is assuming that this is like the tech bubble burst or a normal bear market could be greatly deceived. There is the equivalent of a Financial (Black Plague) occurring and no one knows how wide spread it is.

Not sure how accurate this is but it provides an overview. Commodity Futures Modernization Act of 2000 - Wikipedia, the free encyclopedia

[youbet]

Quote:

Originally Posted by chinaco It is obvious that most (perhaps all) legislators signed this bill without understanding the potential problem.

Thus the Congresscritters and Clinton share fully in the blame. Don't be anxious to let them off the hook. Understanding bills they sign and/or vote "aye" for is their role on earth. They knew if they didn't understand it or didn't agree with it, they shouldn't sign it.

It's important that each of these people go to their grave understanding they had a choice in this matter and they made the wrong decision.

[ERD50]

Quote:

Originally Posted by chinaco It is obvious that most (perhaps all) legislators signed this bill without understanding the potential problem. Most politicians would not sign this type of legislation if they knew....

This is the main reason I am on such a "less government" kick.

All Congress bashing aside, even if every Congressperson was a certified genius, they simply cannot have expertise in all the areas that they are now involved in.

Just look at the detail level of the bills in Congress. It is insane. T-Al pointed out a while back (this was a CA bill, but the idea holds), about how the bill banning incandescent bulbs had exceptions for all these specific types of bulbs, right down to the number of standoffs holding the filament, technical restrictions on the filament, bulb base size, etc, etc, etc.

How many CA congress members are conversant in light bulb design? Why are they voting on these issues? Why are they taking the time to get them written into legalese and debate them? Insane.

BTW, that does not mean I think they should ignore important issues, but I think any laws should address issues at a high level, not the micro-management level. In the example of the incandescent light bulb ban - if it really is in the "common good" for people to conserve electricity, raise the taxes on it, and let the free market figure out what kind of light bulbs to design, plus a million other ideas that could save electricity - more than any legislatures could come up with in a law.

-ERD50