WASHINGTON (Reuters) - President Barack Obama defended on Saturday a consumer watchdog agency the financial industry wants to weaken or strip from legislation that would strengthen the regulation of Wall Street. Barack Obama | Economy The Democratic-controlled House of Representatives on Friday approved the biggest changes in financial regulation since the Great Depression -- a much-needed victory for Obama, whose job approval rating has fallen below 50 percent. He and his fellow Democrats want to impose steps that would avoid a repeat of the meltdown that put the U.S. economy on the brink of collapse a year ago, and he used his weekly radio and Internet address to argue for "common-sense reforms." The bill would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms. Republicans and lobbyists for banks and Wall Street firms, whose profits could be threatened, have fought for months to weaken and delay reforms, criticizing what they call an unneeded and costly intrusion on business.
WASHINGTON (Reuters) - President Barack Obama defended on Saturday a consumer watchdog agency the financial industry wants to weaken or strip from legislation that would strengthen the regulation of Wall Street.
Barack Obama | Economy
The Democratic-controlled House of Representatives on Friday approved the biggest changes in financial regulation since the Great Depression -- a much-needed victory for Obama, whose job approval rating has fallen below 50 percent.
He and his fellow Democrats want to impose steps that would avoid a repeat of the meltdown that put the U.S. economy on the brink of collapse a year ago, and he used his weekly radio and Internet address to argue for "common-sense reforms."
The bill would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms.
Republicans and lobbyists for banks and Wall Street firms, whose profits could be threatened, have fought for months to weaken and delay reforms, criticizing what they call an unneeded and costly intrusion on business.
LONDON (Reuters) - The Conservatives would cut a big chunk of the budget deficit within four years if they win an election as expected next year, Conservative shadow chancellor George Osborne said on Saturday. Labour, behind the Conservatives in opinion polls with an election due by June 2010, laid out plans this week to halve the deficit -- set to near 13 percent of gross domestic product this year -- over four years. The Conservatives have said they would act faster than that, aiming to keep interest rates as low as possible for as long as possible to aid recovery.
LONDON (Reuters) - The Conservatives would cut a big chunk of the budget deficit within four years if they win an election as expected next year, Conservative shadow chancellor George Osborne said on Saturday.
Labour, behind the Conservatives in opinion polls with an election due by June 2010, laid out plans this week to halve the deficit -- set to near 13 percent of gross domestic product this year -- over four years.
The Conservatives have said they would act faster than that, aiming to keep interest rates as low as possible for as long as possible to aid recovery.
A Conservative government would, he says, put spending cuts before tax rises. "I am quite clear that the bulk of this has to come from curbing public spending. The Government overspent and overborrowed, it's not that we were undertaxed." Tory frontbenchers have been told to find substantial savings across the board. If Mr Osborne becomes Chancellor he intends to set up a "star chamber", including Cabinet ministers without spending departments, to decide where the axe should fall. Ministers would have to pitch to their colleagues for cash. "The Prime Minister and the Chancellor just hand out spending decisions. There is no collective bargaining. That's demeaning for government," he says. "What you need at a time of economic challenge is collective political will to deal with it." Would he like to save money by scrapping Trident? "We need to look across the board at getting value for money and that includes defence projects," he says. The BBC should get into the real world. "The salaries need to reflect the economic conditions. As and when they find savings, I would want that money to go back to licence-fee payers." Crossrail is less of a target. "I have a French view that these grands projets, when it comes to transport spending, are worth it. The [north-south] high-speed rail link is also enormously expensive, but I'd like to see it built. These big infrastructure projects will power the future." What about the third runway at Heathrow? "It's not going to happen."
A Conservative government would, he says, put spending cuts before tax rises. "I am quite clear that the bulk of this has to come from curbing public spending. The Government overspent and overborrowed, it's not that we were undertaxed."
Tory frontbenchers have been told to find substantial savings across the board. If Mr Osborne becomes Chancellor he intends to set up a "star chamber", including Cabinet ministers without spending departments, to decide where the axe should fall. Ministers would have to pitch to their colleagues for cash. "The Prime Minister and the Chancellor just hand out spending decisions. There is no collective bargaining. That's demeaning for government," he says. "What you need at a time of economic challenge is collective political will to deal with it."
Would he like to save money by scrapping Trident? "We need to look across the board at getting value for money and that includes defence projects," he says. The BBC should get into the real world. "The salaries need to reflect the economic conditions. As and when they find savings, I would want that money to go back to licence-fee payers."
Crossrail is less of a target. "I have a French view that these grands projets, when it comes to transport spending, are worth it. The [north-south] high-speed rail link is also enormously expensive, but I'd like to see it built. These big infrastructure projects will power the future." What about the third runway at Heathrow? "It's not going to happen."
What can I say, better late than never for the Tories to decide it's worth it to spend at least one penny of public money on high speed rail. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
He has to cut defence but he won't. He needs to raise taxes on those most able to pay but he won't. He needs to tax City transactions but he won't.
so he's going to destroy the UK social security safety net while bleating that it's necessary pain to save jobs. The NHS will probably get gutted and private pensions will be wrecked again.
I would get angrier if that wasn't identical to what the conservatives dressed up as Labour would do; instead I just feel tired and helpless. We are becoming all of the bad bits of the USA, just what Brown and Cameron have always wanted. keep to the Fen Causeway
This would still increase the total government debt by 32% of GDP over the 4 years of a Tory administration.
To "cut debt" the Tories would have to come up with a way to expand GDP faster than Labour by at least 32% over 4 years. A tall order. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Important missing word... En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
BERLIN (Reuters) - Regulation and oversight will boost, not hinder, economic growth, and the European Central Bank plans to take initiatives to help relaunch securitisation "on a sound basis," the ECB's Lucas Papademos said on Saturday. "The current economic and financial crisis...provides very convincing evidence that regulatory reform and macroprudential oversight will support sustainable growth," the ECB's vice-president said at an event in Berlin. Papademos said policymakers could employ other instruments to foster growth and innovation in the financial sector, including measures to relaunch securitisation.
BERLIN (Reuters) - Regulation and oversight will boost, not hinder, economic growth, and the European Central Bank plans to take initiatives to help relaunch securitisation "on a sound basis," the ECB's Lucas Papademos said on Saturday.
"The current economic and financial crisis...provides very convincing evidence that regulatory reform and macroprudential oversight will support sustainable growth," the ECB's vice-president said at an event in Berlin.
Papademos said policymakers could employ other instruments to foster growth and innovation in the financial sector, including measures to relaunch securitisation.
German Chancellor Angela Merkel today ruled out joining France and the UK in introducing a one-off `super-tax' on large bonuses paid out by banks rescued from the brink of collapse by EU member states. "A tax on bonuses is a charming idea, but we have constitutional concerns," Merkel said. "I can't just ignore the constitutionMerkel said the constitutional questions would prevent such a tax "this year", a comment that leaves open the possibility that Germany may eventually make possible a tax on bonuses. Merkel said that, in any case, "a tax on bonuses is not sufficient, we also need a transaction tax" - a reference to her support for a global levy on cross-border financial transactions. "It's unacceptable that people are returning to business as usual after what happened a year, a year and a half ago," Merkel said.
German Chancellor Angela Merkel today ruled out joining France and the UK in introducing a one-off `super-tax' on large bonuses paid out by banks rescued from the brink of collapse by EU member states.
"A tax on bonuses is a charming idea, but we have constitutional concerns," Merkel said. "I can't just ignore the constitution
Merkel said the constitutional questions would prevent such a tax "this year", a comment that leaves open the possibility that Germany may eventually make possible a tax on bonuses.
Merkel said that, in any case, "a tax on bonuses is not sufficient, we also need a transaction tax" - a reference to her support for a global levy on cross-border financial transactions.
"It's unacceptable that people are returning to business as usual after what happened a year, a year and a half ago," Merkel said.
From the perspective of US financial markets, a Japanese-style lost decade has defined the performance of equities and bonds since the start of 2000. From the heady days of the technology bubble, the S&P 500 is 11 per cent lower over the decade, when you include the reinvestment of dividends. In contrast, an index of long-term Treasury bonds has risen more than 116 per cent, according to Barclays Capital. The doubling in the value of long-term Treasuries helps explains why the famed "bond vigilantes" of prior decades have been missing in action. This has largely been a decade of disinflationary forces thanks to the internet and globalisation. There have been two very aggressive cycles of rate-cutting since 2000 by the Federal Reserve and it is little wonder that bonds have been the big beneficiary. Instead of "bond vigilantes" worried about inflation and rising deficits, the decade is described by some as one where "risk vigilantes" have ruled the roost. When the technology bubble popped, the risk of a nasty recession and deflation meant markets moved quickly to price in big rate cuts. On that score, the Fed delivered - an extended period of easy money softened the blow of recession in 2001, sowing some of the seeds of a massive mortgage and credit bubble which culminated in the financial crisis of 2007/2008. Today, the current policy prescription of even cheaper money has many worried about the value of the dollar and the risk of higher inflation in coming years, given the outlook of massive budget deficits and record issuance of US Treasuries. Amid fears of a new financial bubble in commodities and bonds, some forecast the Fed could start raising rates late next summer and wean the US economy off easy money.
From the perspective of US financial markets, a Japanese-style lost decade has defined the performance of equities and bonds since the start of 2000.
From the heady days of the technology bubble, the S&P 500 is 11 per cent lower over the decade, when you include the reinvestment of dividends. In contrast, an index of long-term Treasury bonds has risen more than 116 per cent, according to Barclays Capital.
The doubling in the value of long-term Treasuries helps explains why the famed "bond vigilantes" of prior decades have been missing in action. This has largely been a decade of disinflationary forces thanks to the internet and globalisation. There have been two very aggressive cycles of rate-cutting since 2000 by the Federal Reserve and it is little wonder that bonds have been the big beneficiary. Instead of "bond vigilantes" worried about inflation and rising deficits, the decade is described by some as one where "risk vigilantes" have ruled the roost.
When the technology bubble popped, the risk of a nasty recession and deflation meant markets moved quickly to price in big rate cuts. On that score, the Fed delivered - an extended period of easy money softened the blow of recession in 2001, sowing some of the seeds of a massive mortgage and credit bubble which culminated in the financial crisis of 2007/2008.
Today, the current policy prescription of even cheaper money has many worried about the value of the dollar and the risk of higher inflation in coming years, given the outlook of massive budget deficits and record issuance of US Treasuries. Amid fears of a new financial bubble in commodities and bonds, some forecast the Fed could start raising rates late next summer and wean the US economy off easy money.
Instead of "bond vigilantes" worried about inflation and rising deficits, the decade (2000-2010?) is described by some as one where "risk vigilantes" have ruled the roost.
Oh, wait! Vigilantes. Quantrill's Raiders? With whom Jesse James and much of the James-Younger Gang served during the Civil War. They fancied themselves "vigilantes" to the end, robbing banks from Coffeyville, Kansas to Northfield, Minnesota. Perhaps FT means that modern "risk vigilantes" rob banks from the inside. Or is that just because my dissonance fuse is blown? As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?The question's pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.
The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?
The question's pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.
Recognisable productsThe products that modern-day Islamic bankers have created are very similar to conventional products. So similar, in fact, that to an outside observer they could be considered the same. Islamic banks now offer Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic time deposit and guaranteed return accounts, Islamic insurance and some even offer Islamic managed and hedge funds. This point is conceded by Samir Alamad, Sharia, or Islamic law, compliance and product development manager of the Islamic Bank of Britain. "The industry does not want to alienate its products," he says. "They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia.
Recognisable products
The products that modern-day Islamic bankers have created are very similar to conventional products. So similar, in fact, that to an outside observer they could be considered the same.
Islamic banks now offer Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic time deposit and guaranteed return accounts, Islamic insurance and some even offer Islamic managed and hedge funds.
This point is conceded by Samir Alamad, Sharia, or Islamic law, compliance and product development manager of the Islamic Bank of Britain.
"The industry does not want to alienate its products," he says.
"They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia.
Banking is bankingThis makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager. That is why the top scholars can earn so much money - often six-figure sums for each ruling. The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory. "To date, most Islamic financiers have been looking at examples of financing in Islamic history and figuring out how to apply them to today's financial products." But banking is banking. It is the taking of a deposit and then using it to finance a purchase or business. The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money "rents" it off the bank. The same symbiotic relationship occurs whether it is conventional banking, ethical banking, Islamic banking or Presbyterian banking. As Majid Dawood, chief executive of Yasaar, a UK-based Islamic finance consultancy says: "Everything that is not forbidden in the Holy Qur'an is OK. "Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old."
Banking is banking
This makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager.
That is why the top scholars can earn so much money - often six-figure sums for each ruling.
The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory.
"To date, most Islamic financiers have been looking at examples of financing in Islamic history and figuring out how to apply them to today's financial products."
But banking is banking.
It is the taking of a deposit and then using it to finance a purchase or business.
The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money "rents" it off the bank.
The same symbiotic relationship occurs whether it is conventional banking, ethical banking, Islamic banking or Presbyterian banking.
As Majid Dawood, chief executive of Yasaar, a UK-based Islamic finance consultancy says: "Everything that is not forbidden in the Holy Qur'an is OK.
"Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old."
Interesting article.
Firstly, the sheer hypocrisy of this so-called "Islamic" banking shines through. It is simply putting lipstick on the pig. If there is such a thing as Islamic leverage, I have never seen it justified.
Secondly, it repeats the general misapprehension that banks take in deposits and lend them out again. That is not the case: banks create credit (and this is our money) 'ex nihilo' as interest-bearing debt based upon an amount of regulatory capital. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia.
Religious hypocrisy rules keep to the Fen Causeway
It is simply putting lipstick on the pig.
Banking makes all pigs halal.
I frequently agree with ideas expressed on New Geography but certainly not Ian Abley's article There is no "Free Market" Housing Solution Home Price IndexHome Price Index On 24 November 2009 the Housing Minister John Healey confirmed that Britain will be the first country in the world to require zero carbon homes as a matter of law from 2016. Britain is the world leader in green ideology. All of the newly built British housing will have much better insulated walls, windows, roofs and floors. The clear aim of the government is to keep reducing the energy consumption of all new homes to be measured in kilowatt-hours per square metre of floor area per year. The commitment to "zero carbon" allows government to appear virtuous in its legislation for the new build sector. This suits the financial markets as well, since it guarantees house price inflation by making it difficult to meet the demographic demand for homes. Environmentalism offers more and more reasons not to build. Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next. .... The market is not capable of being a "free market". Capitalism is a system of control by political and commercial elites, and their professional employees. British capitalists tend to be less interested in industry, which is held to have caused Climate Change, and more interested in finance these days. Missing The Free Market BoatMissing The Free Market Boat Ian Abley misses the boat. I would agree that "there is no free market". However, it is foolish to say "there is no free market solution". The solution is there, the problem is government pandering for social and political goals interferes with the solution. Common Sense vs. Green Thinking This is not a "space issue" or a "green issue". That bubbles eventually pop is both a mathematical certainty and common sense. Temporarily, credit bubbles, green policies, and ownership societies can prop up home prices. However, once consumer attitudes change, there is nothing government can do to prop up prices of homes or anything else, short of causing hyperinflation. .... I find it amazing that anyone can watch the US housing bubble bust wide open, yet propose "Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next". .... Common Sense vs. Green Thinking This is not a "space issue" or a "green issue". That bubbles eventually pop is both a mathematical certainty and common sense. Temporarily, credit bubbles, green policies, and ownership societies can prop up home prices. However, once consumer attitudes change, there is nothing government can do to prop up prices of homes or anything else, short of causing hyperinflation. Once attitudes change, if "zero carbon" or other government nonsense makes homes cost more than people are willing to pay, all economic homebuilding activity will simply cease! .... In this sense, the free market cannot and will not be defeated. How long it takes for the bubble to blow up in the UK, Australia, and Canada is at this point the only question. I find it amazing that anyone can watch the US housing bubble bust wide open, yet propose "Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next".
Home Price IndexHome Price Index
On 24 November 2009 the Housing Minister John Healey confirmed that Britain will be the first country in the world to require zero carbon homes as a matter of law from 2016. Britain is the world leader in green ideology. All of the newly built British housing will have much better insulated walls, windows, roofs and floors. The clear aim of the government is to keep reducing the energy consumption of all new homes to be measured in kilowatt-hours per square metre of floor area per year. The commitment to "zero carbon" allows government to appear virtuous in its legislation for the new build sector. This suits the financial markets as well, since it guarantees house price inflation by making it difficult to meet the demographic demand for homes. Environmentalism offers more and more reasons not to build. Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next. .... The market is not capable of being a "free market". Capitalism is a system of control by political and commercial elites, and their professional employees. British capitalists tend to be less interested in industry, which is held to have caused Climate Change, and more interested in finance these days.
All of the newly built British housing will have much better insulated walls, windows, roofs and floors. The clear aim of the government is to keep reducing the energy consumption of all new homes to be measured in kilowatt-hours per square metre of floor area per year.
The commitment to "zero carbon" allows government to appear virtuous in its legislation for the new build sector.
This suits the financial markets as well, since it guarantees house price inflation by making it difficult to meet the demographic demand for homes. Environmentalism offers more and more reasons not to build. Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next.
....
The market is not capable of being a "free market". Capitalism is a system of control by political and commercial elites, and their professional employees. British capitalists tend to be less interested in industry, which is held to have caused Climate Change, and more interested in finance these days.
Missing The Free Market BoatMissing The Free Market Boat Ian Abley misses the boat. I would agree that "there is no free market". However, it is foolish to say "there is no free market solution". The solution is there, the problem is government pandering for social and political goals interferes with the solution.
Common Sense vs. Green Thinking
This is not a "space issue" or a "green issue". That bubbles eventually pop is both a mathematical certainty and common sense. Temporarily, credit bubbles, green policies, and ownership societies can prop up home prices. However, once consumer attitudes change, there is nothing government can do to prop up prices of homes or anything else, short of causing hyperinflation.
I find it amazing that anyone can watch the US housing bubble bust wide open, yet propose "Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next".
This is not a "space issue" or a "green issue". That bubbles eventually pop is both a mathematical certainty and common sense. Temporarily, credit bubbles, green policies, and ownership societies can prop up home prices. However, once consumer attitudes change, there is nothing government can do to prop up prices of homes or anything else, short of causing hyperinflation. Once attitudes change, if "zero carbon" or other government nonsense makes homes cost more than people are willing to pay, all economic homebuilding activity will simply cease!
In this sense, the free market cannot and will not be defeated. How long it takes for the bubble to blow up in the UK, Australia, and Canada is at this point the only question. I find it amazing that anyone can watch the US housing bubble bust wide open, yet propose "Green thinking ensures that house price inflation can be sustained through a bubble, and projected beyond the bursting of that period of financialisation into the next".
It would appear that Ian Abley would like to attribute problems with housing shortages to attempts to deal with climate change. A typical Neo-Classical Economics ploy: frame the issue as one of a choice of two equally unpalatable choices. Different arrangements surely could result in more affordable "green" housing, even if it had to entail "planning", a choice NCE would not like to contemplate. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Median income is £22k.
What has happened is that people are renting, sharing, or both. Or they're not leaving home at all. We have an entire generation of people under thirty who have almost no prospect at all of owning a house - especially in London.
you are the media you consume.
Also a lot of property was bought on "buy to let" mortgages (pay off interest only) which catastrophically distorted the market.Plus people are beggaring themselves to get on the housing ladder. keep to the Fen Causeway
Welcome to the club. See this and that. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Britain's financiers and entrepreneurs are quitting the UK at a rate of 10 a week to avoid Labour's new 50% taxes. The burgeoning exodus threatens to deepen a £178 billion black hole in the public finances and leave middle-class voters with higher taxes for years to come, figures obtained from Companies House reveal. The number of directors of British businesses registered as living in the low-tax centres of Jersey, Guernsey or the Isle of Man has risen by almost 500 to 6,729 in the past 12 months. The British Virgin Islands is also a popular destination, with 615 directors of UK companies now based in the Caribbean tax haven -- an 18% rise on a year ago.
Britain's financiers and entrepreneurs are quitting the UK at a rate of 10 a week to avoid Labour's new 50% taxes.
The burgeoning exodus threatens to deepen a £178 billion black hole in the public finances and leave middle-class voters with higher taxes for years to come, figures obtained from Companies House reveal.
The number of directors of British businesses registered as living in the low-tax centres of Jersey, Guernsey or the Isle of Man has risen by almost 500 to 6,729 in the past 12 months.
The British Virgin Islands is also a popular destination, with 615 directors of UK companies now based in the Caribbean tax haven -- an 18% rise on a year ago.
for chrissakes why are nation states so weak when faced with the rolling coup that global finance represents ? This is becoming an existential threat where states must determine what they exist to do. If they serve international capital then the interests of the citizenry must be sacrificed. Its either/or time and I think that they're making the finacier's preferred choice. keep to the Fen Causeway
That's nothing UK tax law cannot fix, is it? We're talking directors of British businesses establishing residence in known tax havens on British Crown Dependencies. Why can't Her Majesty's Revenue and Customs exact revenue from them in those locations? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American Insurance Group Inc. Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms. A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks. Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions. In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner--AIG, according to the Journal's analysis and people familiar with the trades.
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.
In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner--AIG, according to the Journal's analysis and people familiar with the trades.
Earlier reports had indicated that Goldman bought CDOs from AIG rather than from the monoline insurers because AIG would agree to post additional collateral if the value of the CDO declined, which the monolines would not do. This WSJ article indicates that GS sold CDOs to the same banks that it sold CDSs and then laid off the risk on AIG for less than GS charged its own customers. And when AIG couldn't post as much additional collateral as GS asked for, GS bought default insurance from other banks on AIG. This was before AIG's meltdown. This casts the following two quotes from the WSJ article in a different light:
A Goldman spokesman says that up until AIG was rescued by the government, the insurer "was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent." "What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.
"What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.
Former AIG chief executive of financial products until 2000, Tom Savage, is quoted saying: "It seems shocking to me that Goldman would become so exposed to AIG and kept doing deals with them and laying on the risk," In fact there is question that the banks from which GS purchased default insurance on AIG would not have been able to cover the loss either.
The one scenario that makes sense is that "the smartest guys in the room" planned going in for the FRB of New York, the Chairman of the Fed and the Secretary of the Treasury to bail them out if things went really bad, as they had good reason to fear they would. It appears "possible" GS knew this was a game of "pass the time bomb" and GS had the best read on when the clock was going to time out.
Yves also has some interesting speculation on the timing and nature of the information disclosed in this WSJ article in her Links 12/12/09. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
