This article raises many intriguing questions only one of which I will touch on today. (tune in for a further discussion covering issues that Cassidy hints at....)
We might ask: what exactly did the Dodd-Frank Bill do to curb the excesses of a profit-driven excesses of Wall Street in the wake of the global economic tsunami involving marketing bundled mortgages that are the toxic detritus and one sign of an industry run amok, a world economy that is virtually stifled and millions of people thrown out of their once-stable jobs.
Here is a telling illustration of the bull run wild while the rest of the country can only stare sheepishly at the mania.
A credit default swap is a type of derivative used exclusively for speculation. "When an investor or financial institution buys this kind of swap, its doesn't buy a bond itself; it just places a bet on whether the bond will default At the height of the boom, for every dollar banks issued in bonds, they might issue twenty dollars in swaps.'If they did a hundred million dollar bond issue, two billion dollars of swaps would be created and traded.'" {Cassidy quoting Ralph Schlosstein, the C.E.O. of Evercore; the latter has a most impressive resume serving the Treasury Dept under President Carter and Wall Street see page 53}
Cassidy's continues with the folly of this particular derivative: "From the banks' perspective, creating this huge market in side bets (italics mine) was very profitable insanity. By late 2007, the notional value of outstanding credit-default was about SIXTY TRILLION DOLLARS-MORE THAN FOUR TIMES THE SIZE OF THE U.S. GROSS DOMESTIC." (emphasis mine).
Here is a telling illustration of the bull run wild while the rest of the country can only stare sheepishly at the mania.
A credit default swap is a type of derivative used exclusively for speculation. "When an investor or financial institution buys this kind of swap, its doesn't buy a bond itself; it just places a bet on whether the bond will default At the height of the boom, for every dollar banks issued in bonds, they might issue twenty dollars in swaps.'If they did a hundred million dollar bond issue, two billion dollars of swaps would be created and traded.'" {Cassidy quoting Ralph Schlosstein, the C.E.O. of Evercore; the latter has a most impressive resume serving the Treasury Dept under President Carter and Wall Street see page 53}
Cassidy's continues with the folly of this particular derivative: "From the banks' perspective, creating this huge market in side bets (italics mine) was very profitable insanity. By late 2007, the notional value of outstanding credit-default was about SIXTY TRILLION DOLLARS-MORE THAN FOUR TIMES THE SIZE OF THE U.S. GROSS DOMESTIC." (emphasis mine).
Of course, the incentive for selling 60 trillion dollars in these swaps is the huge amount of commissions the financial institution charges its customers.
We might ask what has happened to the traditional function of investment banks, such as Citibank (given a government bailout of $45 Billion in 2008), to raise capital for existing and emerging companies? Cassidy succinctly answers that within the first 9 months of this year "within the investment bank (Citi) about eighty cents of every dollar in revenues came from buying and selling securites, while just fourteen cents of every dollar came from raising capital for companies and advising them on deals."
I urge everyone in the securities business or anyone affected by Wall Street-aren't WE ALL??-- to read this timely article and seriously ask themselves the same question: What Good is Wall Street Doing?
I will return to the issues raised by this timely and penetrating analysis by Mr. Cassidy.
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