Bear Sterns, the airlines even The Donald should have gone bankrupt.

[ziggy29]

I think I may have mis-interpreted "margin account".

Let's say you have $100,000 in equity in a margin account with a 50% margin requirement. This $100K is invested in, say, CMOs.

That means you can "borrow" up to an additional $100,000 to purchase more CMOs, using the original securities as collateral. You retain 50% "equity" in the margin account, the minimum allowable.

Let's say they raise the margin requirements to 66 2/3% -- that is, your equity needs to be at least 2/3 as much as the security value in the account. That means that your $100K equity can only control a total of $150K in securities. Thus, you will be hit with a "margin call" to sell $50,000 of these CMOs in order to make the call. (The other alternative would be to inject another $100,000 in cash.)

But if you did this, a LOT of investors and institutions would be hit with the same margin calls. You'd have an obscene number of sellers and almost no buyers. The market value of the underlying securities would plummet as a result. Let's say that when you mark to market these securities lose 20% of value because of all the sellers, no buyers and little liquidity. Now even after you sold that $50K to meet the margin call, you now have $50,000 borrowed on a portfolio that is now worth $120,000 (20% less than the $150,000 these used to be worth). But with $120K of securities, suddenly you have only $70,000 in equity...and that means you can control only $105,000 in securities to meet the 66 2/3% margin requirements. Now you have to sell ANOTHER $15,000 of these securities into an already stressed market, as do many others -- which makes the buyer/seller imbalance even worse and causes the security value to fall more.

Rinse, lather, repeat. You have a potential death spiral. This is exactly the scenario the Fed is trying to avoid by accepting these securities as collateral in exchange for Treasury securities. The Fed doesn't have to sell into margin calls.

 

[brewer12345]

Now I'm on to your next step, where people have to sell "securities" into a no-bid market. What type of securities are they selling? At first, I thought you meant bonds and stocks. But then you go on to say "the ensuing plunge begets yet another margin call". Why? If the sellers owned the securities, why do dropping prices create another margin call? Even if the "securities" were derivatives, that doesn't change the type of margin account above.

What kind of securities are they selling? Anything they can find a bid on. Stocks, bonds, MBS, ABS, life insurance settlements, derivatives of any flavor you'd like, commodities, etc.

Why might successive waves of forced selling beget more margin calls? A simple example: Suppose you write 1 million put options on stock XYZ. You accept a payment up front, say $5 a share, and agree that any time in the next year the owner of the put can sell you the stock at $100 a share regardless of what the market price is. Suppose the market price is $125 when you write the put option, and you also own 10 million shares (of 100 million outstanding). You left some cash on deposit with your broker to secure the put obligation (say, $1 a share). The stock gets hit and goes down to $75, and your broker issues a margin call demanding $10 million in cash. Your only other asset is shares of XYZ, so you start selling to meet the margin call. You meet the mmargin call, but in doing so you knocked the stock down to $65, so the next day the broker wants another $5 million cash. So you start selling more XYZ... etc.

The above is one of the things that happened in the credit and credit derivative markets in the last 6 months that helped them crash.

 

[FIRE'd@51]

I don't get the "exposure to the tune of the notional value". For example, I've got an interest rate swap with a notional of $100 million, and Bear owes me, they only owe the difference in interest rates, maybe 1-2%, times the $100 million. That means I'm out $1-2 million. I'm not short the whole notional amount.

Actually, if your counter-party fails you are exposed on the whole notional amount. That's not to say you have lost the whole notional amount - just that it is exposed to loss.

Also, you have picked an example where the loss is relatively small. As you know, these derivative contracts exist on almost everything, including assets where there is much more volatility than 1-2% of the notional amount. Suppose you had entered into a swap to hedge a $100 million portfolio of financial stocks last year. Your portfolio might be down 50%, the loss of which is offset by the swap. If your counter-party fails and the swap agreement didn't include interim marks to the market (and many don't), you would have lost the full $50 million. Even with interim marks, your loss could be substantially more than 1-2%. Credit default swaps, commodity swaps, swaps on individual stocks, etc. can be extremely volatile, and you can experience great losses should you become unhedged through counter-party failure.

 

[Independent]

Let's say you have $100,000 in equity in a margin account with a 50% margin requirement. This $100K is invested in, say, CMOs.

That means you can "borrow" up to an additional $100,000 to purchase more CMOs, using the original securities as collateral. You retain 50% "equity" in the margin account, the minimum allowable.

Let's say they raise the margin requirements to 66 2/3% -- that is, your equity needs to be at least 2/3 as much as the security value in the account. That means that your $100K equity can only control a total of $150K in securities. Thus, you will be hit with a "margin call" to sell $50,000 of these CMOs in order to make the call. (The other alternative would be to inject another $100,000 in cash.)

But if you did this, a LOT of investors and institutions would be hit with the same margin calls. You'd have an obscene number of sellers and almost no buyers. The market value of the underlying securities would plummet as a result. Let's say that when you mark to market these securities lose 20% of value because of all the sellers, no buyers and little liquidity. Now even after you sold that $50K to meet the margin call, you now have $50,000 borrowed on a portfolio that is now worth $120,000 (20% less than the $150,000 these used to be worth). But with $120K of securities, suddenly you have only $70,000 in equity...and that means you can control only $105,000 in securities to meet the 66 2/3% margin requirements. Now you have to sell ANOTHER $15,000 of these securities into an already stressed market, as do many others -- which makes the buyer/seller imbalance even worse and causes the security value to fall more.

Rinse, lather, repeat. You have a potential death spiral. This is exactly the scenario the Fed is trying to avoid by accepting these securities as collateral in exchange for Treasury securities. The Fed doesn't have to sell into margin calls.

Yes, I understand this scenario. The first time I heard the phrase "buying stocks on the margin" it had to do with the 1929 crash. My understanding was that margin requirements were very low then (maybe 10%) and the gov't increased them to 50% to prevent exactly this type of spiral.

If even the 50% leads to so much leverage that the whole economy can collapse, then I have to wonder if any margin buying should be allowed. Do we (all of us, not just the buyers) get enough economic efficiency out of this practice to make it worth our while to allow it?

 

[FinanceDude]

Do we (all of us, not just the buyers) get enough economic efficiency out of this practice to make it worth our while to allow it?

I doubt it for the small investor...........

 

[Independent]

What kind of securities are they selling? Anything they can find a bid on. Stocks, bonds, MBS, ABS, life insurance settlements, derivatives of any flavor you'd like, commodities, etc.

Why might successive waves of forced selling beget more margin calls? A simple example: Suppose you write 1 million put options on stock XYZ. You accept a payment up front, say $5 a share, and agree that any time in the next year the owner of the put can sell you the stock at $100 a share regardless of what the market price is. Suppose the market price is $125 when you write the put option, and you also own 10 million shares (of 100 million outstanding). You left some cash on deposit with your broker to secure the put obligation (say, $1 a share). The stock gets hit and goes down to $75, and your broker issues a margin call demanding $10 million in cash. Your only other asset is shares of XYZ, so you start selling to meet the margin call. You meet the mmargin call, but in doing so you knocked the stock down to $65, so the next day the broker wants another $5 million cash. So you start selling more XYZ... etc.

The above is one of the things that happened in the credit and credit derivative markets in the last 6 months that helped them crash.

Brewer, I think I can understand this next step. A margin call leads to a distress sale of a real asset, but that asset is the underlying on another derivative, so somebody else is calling for cash because of that drop.

I want to be sure that the type of "margin account" you're talking about here isn't the type that Ziggy is talking about. Correct?

It looks to me like the drop to $75 puts the put (bad choice of words) into the money by $25 a share. Since the option is on 1 million shares, would the dealer be looking for $10 milliion or $25 million additional money? Again, I'm not sure how brokers determine margin requirement.

That said, if there is a call option someplace else in the system, it seems that the margin needs on that option have gone down. I can see why it wouldn't be symetric in your example, because the price has fallen so far.

My impression was that the big run up in derivative volumes comes from intermediaries (I'm not sure of the names, "dealers", "brokers", "banks"?) who are managing large blocks of derivatives and work hard to make the block risk-neutral. For example, if UBS is doing derivatives driven by Euro vs. Dollar exhange rates, then UBS wants to be in the position where an upward shift in the rate produces exactly offsetting gains and losses on its block, so there is no net impact on UBS's bottom line. They seem to brag that they use sophisticated mathematical techniques to keep themselves in that position. It seems that any margin increases they would expect from their customers would be offset by margin decreases with other customers.

So is that true? If so, I can see that there would still be other derivatives out there that aren't part of managed blocks and could have an overall bias in one direction or the other. Is this what's going on? Or does all the sophisticated management fail when the movements get too big?

 

[ziggy29]

I want to be sure that the type of "margin account" you're talking about here isn't the type that Ziggy is talking about. Correct?

An institutional portfolio subject to "margin requirements" isn't strictly the same as a "margin account" for an individual investor, but margin requirements work the same way in either case, and similar dynamics can trigger a death spiral -- falling prices beget margin calls which beget selling which begets lower prices which begets another margin call which begets more selling which begets....

 

[brewer12345]

My impression was that the big run up in derivative volumes comes from intermediaries (I'm not sure of the names, "dealers", "brokers", "banks"?) who are managing large blocks of derivatives and work hard to make the block risk-neutral. For example, if UBS is doing derivatives driven by Euro vs. Dollar exhange rates, then UBS wants to be in the position where an upward shift in the rate produces exactly offsetting gains and losses on its block, so there is no net impact on UBS's bottom line. They seem to brag that they use sophisticated mathematical techniques to keep themselves in that position. It seems that any margin increases they would expect from their customers would be offset by margin decreases with other customers.

So is that true? If so, I can see that there would still be other derivatives out there that aren't part of managed blocks and could have an overall bias in one direction or the other. Is this what's going on? Or does all the sophisticated management fail when the movements get too big?

We all hope (as do the regulators) that the dealerrs do indeed run matched books. Given the dynamic nature of these portfolios, it is anyone's guess as to whether this is really true.

The real problem is in the counterparties to the dealer. When a trade goes awry in normal times, you suck it up and get on with life. In bad times, it can be catastrophic. To give you a plain vanilla idea, there are publicly traded REITs that do nothing but invest in a leveraged portfolio of agency MBS. This paper is very safe - backed by conforming mortgages and guarateed by Fannie, Freddie or Ginnie. It is usually among the most liquid and safest paper in the world. These trusts got whacked recently. Why? Spreads over treasuries for agency MBS gapped out real wide (and the dollar price of the bonds dropped). At the same time, the swaps that these trusts put on to hedge some of their interest rate exposure (effectively shorting 3 year treasuries) went against them, triggering margin calls. Combine this mess with 8 to 1 leverage and you have lots of forced selling of some of the safest, most liquid paper in existence, begetting more margin calls.

 

[Independent]

An institutional portfolio subject to "margin requirements" isn't strictly the same as a "margin account" for an individual investor, but margin requirements work the same way in either case, and similar dynamics can trigger a death spiral -- falling prices beget margin calls which beget selling which begets lower prices which begets another margin call which begets more selling which begets....

I think I've got the idea. I still have the same question. Economists tell us that if a certain private transactions create large enough "negative externalities", then it's reasonable for the gov't to ban, regulate, or tax those transactions. If institutional investors can cause a general economic meltdown (hurting innocent bystanders like us) due to their activities, should the gov't step in and change the rules?

 

[samclem]

Economists tell us that if a certain private transactions create large enough "negative externalities", then it's reasonable for the gov't to ban, regulate, or tax those transactions. If institutional investors can cause a general economic meltdown (hurting innocent bystanders like us) due to their activities, should the gov't step in and change the rules?

We don't even need a study to determine if the regs should be changed. Since the government deems it worthwhile to jump in and help these firms (using our money) when things might go wrong in a broader way, we've already got the answer on whether the negative externalities are sufficient to warrant more regulations.

I would normally have absolutely no reason to demand that motorcyclists wear a helmet. It's their brain, and whether it stays in their cranium is none of my concern. However, when I am forced to pay for post-accident health care, ongoing therapy, welfare when he/she can't support their family anymore, then I have a right to say something about helmet use. Or whether motorcycles should be legal. Same with the financial markets--they benefit from the regulated playing field and the investor confidence it inspires, but obviously since taxpayers are presently footing the bill (or, more precisely, assuming unexpected levels of risk, which is the same thing in the long run), then we have two alternatives to reduce the costs to taxpayers:
1) Allow the markets to be entirely on their own without any taxpayer-funded bailouts ("Nope, you don't need to wear a helmet--please sign this waiver of govt funded support in case of accident")
2) More govt regulation and oversight commensurate with the now-fully-demonstrated level of risk the government is assuming (explicitly or implicitly)

 

[Independent]

We all hope (as do the regulators) that the dealerrs do indeed run matched books. Given the dynamic nature of these portfolios, it is anyone's guess as to whether this is really true.

The real problem is in the counterparties to the dealer. When a trade goes awry in normal times, you suck it up and get on with life. In bad times, it can be catastrophic. To give you a plain vanilla idea, there are publicly traded REITs that do nothing but invest in a leveraged portfolio of agency MBS. This paper is very safe - backed by conforming mortgages and guarateed by Fannie, Freddie or Ginnie. It is usually among the most liquid and safest paper in the world. These trusts got whacked recently. Why? Spreads over treasuries for agency MBS gapped out real wide (and the dollar price of the bonds dropped). At the same time, the swaps that these trusts put on to hedge some of their interest rate exposure (effectively shorting 3 year treasuries) went against them, triggering margin calls. Combine this mess with 8 to 1 leverage and you have lots of forced selling of some of the safest, most liquid paper in existence, begetting more margin calls.

I'll reword this to see if I understand it. These REITS used leverage to increase the volatility of normally boring Agency MBS. That magnifies the upside when things are going well, and magnifies the down when things go badly. We may have a bad enough down that some of the REITS will be legally bankrupt (although their assets will probably cover their liabilities eventually). That causes problems for their creditors, who may include derivative dealers. Correct?

It seems to me that this puts us right back to my post #6, except that I replace "Bear Stearns" with "Bear Stearns and MBS concentrated REITS".

The problem is still the same, why can't we let them fail the old-fashioned way? My understanding of "prudent management" is that you spread your risks. If a few players didn't, they fail. Their creditors should be diversified. No single creditor should be so exposed to BSC or these REITS that the creditor goes down just because they have to wait for the bankruptcy process to play out before they get their money. The system is supposed to be spreading risk so that a big hit in one sector is a big deal only to a few players who got over-concentrated in that sector.

I think you're saying that at least some of BSC's creditors are so leveraged that even if BSC represents only a normally prudent percent of their book, the leverage magnifies that percent into a solvency issue. Instead of the system dissipating the impact by spreading it across a lot of players, there's enough leverage out there that it gets re-concentrated over and over. Is that right?

 

[clifp]

We don't even need a study to determine if the regs should be changed. Since the government deems it worthwhile to jump in and help these firms (using our money) when things might go wrong in a broader way, we've already got the answer on whether the negative externalities are sufficient to warrant more regulations.

I would normally have absolutely no reason to demand that motorcyclists wear a helmet. It's their brain, and whether it stays in their cranium is none of my concern. However, when I am forced to pay for post-accident health care, ongoing therapy, welfare when he/she can't support their family anymore, then I have a right to say something about helmet use. Or whether motorcycles should be legal. Same with the financial markets--they benefit from the regulated playing field and the investor confidence it inspires, but obviously since taxpayers are presently footing the bill (or, more precisely, assuming unexpected levels of risk, which is the same thing in the long run), then we have two alternatives to reduce the costs to taxpayers:
1) Allow the markets to be entirely on their own without any taxpayer-funded bailouts ("Nope, you don't need to wear a helmet--please sign this waiver of govt funded support in case of accident")
2) More govt regulation and oversight commensurate with the now-fully-demonstrated level of risk the government is assuming (explicitly or implicitly)

What Sam said. (My we do agree a lot.)
Assuming #2 is the eventual answer, (it seems very unlikely that we will have less regulation), how do ensure that the folks who create the risky investment suffer appropriately when the risk fail?

By this I mean, smart guys like Brewer figure out these neat ways of using leverage, securitizing pools of mortgages, and developing credit swaps etc. When everything is going decently they get million dollar bonus, when things are going really well they get 2 million, when things go bad some get fired but the rest keep most of their million dollar bonus.

The people who lose out are the folks (including anybody with an S&P 500 fund) who buy Bear @50 and then get $10 from JPM.

It seems to me that equal smart guys in Silicon Valley invent; iPhones, Google search, Facebook, and Intel microprocessors, and they make millions from stock options. However, the guys who invent pets.com, napster etc, get paid a decent salary but if investors get hurt they get hurt worse cause they never collect the million dollar bonus.

 

[RockOn]

So you think that the people who paid $100+ for the stock and are now being offered $10 didn't get punished? Remember, like most of the big firms, Bear paid out much/most of those big bonuses in company stock.

I would also suggest that you are deluded if you think the Fed got lumbered with low quality securities. What they got are illiquid securities, not necessarily lousy ones.

First point, sure the stockholders did pay paid a price as they should have, but how much did the Bear bond holders lose? Isn't bankrupcy the obvious risk in owning a bond? I think the $29B backing should have come from their equity, not the taxpayers.

Second point, I heard today that the FED has a deal in the works w/Blackstone to sell off the FED/Bear assets. Another commission for the Wall Street MBS gang . If the assets are not that bad, why not let Bear go into liquidation and leave the FED guarantee out of it. Someone would purchased them at some price, the FED could have helped delay the bankrupcy with short term liquidity to allow an orderly sale. Now that the assets are going to be put on the market through a Blackstone "orderly sale", where was the crisis?

 

[saluki9]

Second point, I heard today that the FED has a deal in the works w/Blackstone to sell off the FED/Bear assets. Another commission for the Wall Street MBS gang . If the assets are not that bad, why not let Bear go into liquidation and leave the FED guarantee out of it. Someone would purchased them at some price, the FED could have helped delay the bankrupcy with short term liquidity to allow an orderly sale. Now that the assets are going to be put on the market through a Blackstone "orderly sale", where was the crisis?

I think you're looking for a story that isn't there. The Fed hired Blackrock, not Blackstone. Blackrock is the largest manager of fixed income investments in the US (might be tied with PIMCO) and are more than qualified to do the job. The profits from the sale will go to the NY Fed.

 

[RockOn]

I think you're looking for a story that isn't there. The Fed hired Blackrock, not Blackstone. Blackrock is the largest manager of fixed income investments in the US (might be tied with PIMCO) and are more than qualified to do the job. The profits from the sale will go to the NY Fed.

Sorry, I thought I heard Blackstone, the hearing is the first to go. I still argue the point that they are going to put the securities on the market. Why couldn't that have been done without the taxpayers being on the hook? If they are putting them on the market anyway, where was the crisis?

Also, profits from the sale? you must be kidding

 

[saluki9]

The problem is still the same, why can't we let them fail the old-fashioned way? My understanding of "prudent management" is that you spread your risks. If a few players didn't, they fail. Their creditors should be diversified. No single creditor should be so exposed to BSC or these REITS that the creditor goes down just because they have to wait for the bankruptcy process to play out before they get their money.

Did the Fed step in the help Carlyle Capital? they blew up, lost $650M for their investors and when it's all over possibly in the billions for their lenders.

There is a lot of pain out there right now, especially in the closed end fund and floating rate funds.

 

[brewer12345]

I think you're saying that at least some of BSC's creditors are so leveraged that even if BSC represents only a normally prudent percent of their book, the leverage magnifies that percent into a solvency issue. Instead of the system dissipating the impact by spreading it across a lot of players, there's enough leverage out there that it gets re-concentrated over and over. Is that right?

You got it. Add that to the fact that just about EVERYONE in the capital markets has/had exposure to Bear and you can see why the Fed felt compelled to step in.

My example with the agency REITs was to illustrate that in a stressed market even the safest and most liquid paper on the planet began to drop in value because the maret was not functioning as it should (i.e. orderly buying and selling). Every bank in the US has some of this paper on its books (in part because of its liquidity), so you can imagine what a collapse in the value of it due to market illiquidity would mean.

 

[Independent]

You got it. Add that to the fact that just about EVERYONE in the capital markets has/had exposure to Bear and you can see why the Fed felt compelled to step in.

My example with the agency REITs was to illustrate that in a stressed market even the safest and most liquid paper on the planet began to drop in value because the maret was not functioning as it should (i.e. orderly buying and selling). Every bank in the US has some of this paper on its books (in part because of its liquidity), so you can imagine what a collapse in the value of it due to market illiquidity would mean.

I'm trying to differentiate between EVERYONE and the subset who could actually fail due to the fact that they happen to be BSC's creditors.

I figure that the "Every bank" is mostly regulated commercial banks. The Fed is already set up to give them liquidity bridges. Presumably the regulators also keep them from going very far out on the limb. I'm assuming that my local bank isn't getting leveraged or concentrated to the point that this is could put them under. If they have a short term problem finding a bidder for fundamentally valuable assets, the Fed can deal with that at very little risk to the taxpayers.

So if a BSC bankruptcy was going to lead to a complete financial meltdown, the problem is somewhere else. It sounds like it's in highly leveraged investment banks, securities dealers, and ... ?

Is this as simple as putting a cap on leverage ratios for a wider range of institutions? I can see where that will hurt profits in the good years (fewer mega-million bonuses), but it seems that it would stifle the chain reaction that you are describing.

 

[Independent]

Did the Fed step in the help Carlyle Capital? they blew up, lost $650M for their investors and when it's all over possibly in the billions for their lenders.

There is a lot of pain out there right now, especially in the closed end fund and floating rate funds.

I picked up this quote from Forbes:
"Carlyle Capital, which had borrowed 32 times its capital to fund its investments, like other heavily leveraged funds been particularly vulnerable. "

I certainly wouldn't want the Fed to help them out. My concern is that the Fed would feel they have to back up somebody because peple like this have made the whole system too fragile.

 

[brewer12345]

So if a BSC bankruptcy was going to lead to a complete financial meltdown, the problem is somewhere else. It sounds like it's in highly leveraged investment banks, securities dealers, and ... ?

Is this as simple as putting a cap on leverage ratios for a wider range of institutions? I can see where that will hurt profits in the good years (fewer mega-million bonuses), but it seems that it would stifle the chain reaction that you are describing.

Hedge funds and other unregulated investment vehicles are the other major additions to your list of who gets hurt. I would put the major money center banks in there, too, and maybe some of the dumber/weaker regionals.

There are already leverage limits on regulated financial institutions, and they generally are appropriate (as evnced that very few have fallen out of the sky even in this troubled market). Putting a furter squeeze on these institutions right now would be the exact wrong response, as it would further reduce credit availability. I am pretty sure that is what regulators will do anyway, as they are really good at shutting the barn door after the horse has bolted (and the barn has burned down).

 

[TickTock]

Fleckenstein take on it: Catering to the bailout nation - MSN Money

"After all, this country's median income of roughly $49,000 can hardly be expected to service the debt of the median home price of $234,000, up from approximately $160,000 in 2000.

[snip]

Housing prices, thanks to the bubble and inflation, have risen well past the point where the median (or typical middle-class) family can afford them. Either income must rise -- which seems unlikely on an inflated-adjusted basis -- or home prices must come down."

 

[al_bundy]

decided to pick up The House of Morgan

Amazon.com: The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance: Ron Chernow: Books

about how JP Morgan got started in the early 1800's and it's history through the 20th century. turns out there have been bailouts in the 1800's as well when a big financial firm got in trouble and we are still here and think we are living in a free market

lesson is don't listen to 95% of what reporters write since most of them are idiots and don't know the history of what they are writing. these people took journalism classes and think they know the subject they are writing about

 

[brewer12345]

lesson is don't listen to 95% of what reporters write since most of them are idiots and don't know the history of what they are writing. these people took journalism classes and think they know the subject they are writing about

A safe bet in any case, regardless of the subject.

 

[Independent]

Hedge funds and other unregulated investment vehicles are the other major additions to your list of who gets hurt. I would put the major money center banks in there, too, and maybe some of the dumber/weaker regionals.

There are already leverage limits on regulated financial institutions, and they generally are appropriate (as evnced that very few have fallen out of the sky even in this troubled market). Putting a furter squeeze on these institutions right now would be the exact wrong response, as it would further reduce credit availability. I am pretty sure that is what regulators will do anyway, as they are really good at shutting the barn door after the horse has bolted (and the barn has burned down).

I intended to differentiate between banks that are already regulated (who don't seem to be magnifying the problem) and firms that aren't, or at least aren't regulated with an intent of limiting the damage they can do to the broader system. So I said "wider range".

You don't want to tighten standards on the people who don't seem to be causing the problem, that's reasonable. How about the people who are?

Of course it's always easier to (a) prevent a repeat of the last crisis than it is to (b) prevent a crisis that comes from a truly new direction. It seems that, if we have a pretty good idea of how to do "a", we should at least do that much, even though we know that "b" is still out there.

But in this case, I'm not sure that we know how to do "a". Hence my question, Is this as simple as putting leverage limits on firms that currently don't have any, or is it much more difficult than that?

 

[brewer12345]

But in this case, I'm not sure that we know how to do "a". Hence my question, Is this as simple as putting leverage limits on firms that currently don't have any, or is it much more difficult than that?

What has happened is unprecedented on any scale. Simple as that. The set of regulations that might have prevented this might well put a serious damper on US economic growth.

As for regulations, I expect we will see securities firms like Bear get regulated by the Fed in the future. Kind of goes with giving them access to the discount window, IMO. But beyond that, exactly how do you propose to regulate private companies? What jurisdiction does the Fed and the SEC currently have over private partnerships domiciled offshore (i.e. hedge funds)? Unless Congress passes some very different laws than we curently have, I don't see it. If they do pass such laws, the US is likely to lose a lot of financial services jobs and GDP (and I might well end up working in London, Bermuda, etc.). In any case, regulations are always made to be arbitraged/gotten around, so its only a matter of time before creative people find new ways to blow themselves and others up in size.