Question:will the bailout buy back worthless debt only, or also worthless options on CDS, CDOs, CDO squareds etc.. Is there some measure of what was "a decent attempt at making the economy work" and what was pure speculation/opacity?Remark: So after the packaged mortgages went bad, all banks feared some banks might go bankrupt. This disrupted lending between banks. Turns out all banks had more or less some exposure, and pretty much all banks wrote down something, reducing the amount of cash they could lend. At this stage however the credit tightening didnt need to spread to the industry. In a period where banks were suspect debitors, other corporates were still all good. Why then did the banks spread the credit tightening to the industry? 1: they are selfish morons and like to drag down others with them, hoping for a bailout. More likely though 2: each bank knowing full well the extent of its own exposure to speculative products on toxic debt, knew, given that the fan was hit, the exact amount they were to write down. And this alone was enough to tell them: keep the cash dont lend it, you ll be needing it soon to avoid bankruptcy. So the remark is: it's not a "defiance" crisis, rather every bank is in head deep, and that is why they created the nice recession in the real economy we will be enjoying now. Blather: In the same line, since now the plan is voted, it is time to distribute the blame and think of ways not to err in the same direction. To start, I say: let's forbid all options, traded and OTC. After all, it's been known for 30 years that options are more volatile than the underlying itself, and we have seen how resorting to options did not cure the "incompleteness of markets" ""problem"":In the beginning were corporate clients and they hedged with futures. Then they bought a call and hedged it with future. Then to hedge the call they bought 1st gen exotics. (Then some got distracted and tried to actually win a little money with said exotics.) Then to hedge the call's hedge more calls were needed. Then all these calls needed var swaps, then options on var swaps came along, and now humanity has found the way to have people buying var swaps on baskets of assets in differente currencies, resetting on absurd conditions.. which really have nothing at all do with mitigating the risk of corporate producers. So I say stop: let the banks act as insurers, offsetting the risks of one pool of corporate clients by having a like pool of corporate clients with the opposite interest. (Of course none of this is at all opaque and it would be difficult to siphon away billions in margin.) It turns out, if the sum of corporate interests do not even out, then they should change things in the real world. The capacity of derivatives markets to handle and reduce risk overall has never been convincingly proven to me. Up to this year, the ultimate argument was "it's a trillion dollar industry, and you don't just build a trillion dollar industry on balderdash". (Similar to the existence-of-God argument.) Unfortunately, it's become quite clear this year that balderdash, and trillions, it was. Anyone to join me in a worldwide crusade to forbid derivatives? Any contrary opinion?
Last edited by croot
on October 3rd, 2008, 10:00 pm, edited 1 time in total.