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Tuesday, September 23, 2008

Why not throw these into the package?

While we're completely rewriting the rules of American capitalism -- or more specifically, erasing all the rules and handing the pencil over to the Secretary of the Treasury, here are a few new provisions I'd like to see considered:

1. It shall be unlawful for any employee of any company whose securities are traded on a public securities market to receive from that company or any of its affiliates in any 12-month period compensation for personal services that totals in the aggregate more than $1,000,000.

2. It shall be unlawful to buy or hold any future, forward, option, swap, or other derivative contract, except to the extent that (a) the underlying asset to which the contract pertains is also owned by the holder of the contract, or (b) holding the contract is reasonably necessary as a hedge against risks that would otherwise be incurred by the holder in the conduct of his ongoing trade or business.

Way too drastic? Can these problems be addressed effectively with different rules?

Comments (17)


I would just add that Las Vegas can host those entities that find these conditions for listing objectionable.

I would also add that such conditions could also apply for investment opportunities, publicly traded or not, by any IRS "qualified" retirement plan. It would place a condition on someone's ability to obtain the benefit of reductions/delays in recognition of income taxes. People would still be free as a bird to invest/save/spend as they see fit with their earnings.

Do something to fix the risk /return of mortgages that get written and start the whole process.

Put the broker's commission in escrow and give him 1/6 of it every year for six year. If the mortgagee defaults he loses the remainder of the commission. The broker will be a bit more careful writing mortgages that blow up in two years.

I'll agree about the salaries of the companies. Make it a base and that no bonuses until they sell all the debt from the $700B fund at a profit.

As far as the option thing goes, you have just killed the CBOE. How about Southwest buying futures on gasoline last summer when it was $2/gal and then looking like geniuses this summer. What about the farmer that sells futures to pay his current bills like my relatives?

How about Southwest buying futures on gasoline last summer when it was $2/gal and then looking like geniuses this summer. What about the farmer that sells futures to pay his current bills like my relatives?

My proposal would allow SW to buy gas futures because it's connected with its business. As for the farmer, I could see allowing option sales by an original writer of the option who also owns the underlying asset.

you have just killed the CBOE.

Good riddance. Let's have an options market for those who really need it, and send all the naked gamblers to the Indian casinos.

How about the casios pay more taxes too.
It will keep the futures traders busy and generate needed revenue.

Two interesting headlines from tonight........

Buffett to Invest $5 Billion in Goldman Sachs Group

FBI Is Investigating Companies at Heart of Meltdown

GOP platform 2008

We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all.

The criminal investigation is coming awfully late. Obviously, it's being instigated and promptly leaked to help Moneybags Paulson's swindle package along. I don't think a couple of kisses and winks from the Bush "Justice" Department (neocons only need apply) are going to convince anyone of the merits of the bailout that Goldman Sachs has ordered up. Nice try, though.

Wouldn't a NYPD style perp walk down "wall street" of all of the exec's of these firms in handcuffs make for great TV?

I like Steve's idea, assuming by "broker" he's referring to the lender's agent (not the real estate broker) and/or the underwriter.

Better yet, eliminate underwriting commissions entirely: if they are salaried employees, then you eliminate the inherent conflict of interest that is present when they only get paid on completed transactions. Ideally, they would be paid to evaluate the risk of default, not to minimize it.

When extending credit, the loans you decide are too risky (and decline) are more important than the loans you make.

The same is true for real estate appraisers (who don't get repeat business if they are consistently killing deals), credit rating agencies (who are paid by the bond issuer they are evaluating), and whole life insurance sales reps who get paid much higher commissions (think 9x higher) than if they sold the same amount of term life insurance.

These are blatant conflicts of interest, and I see no reason that free markets and reasonable regulatory oversight (including full disclosure of underwriting criteria and commissions) shouldn't coexist.

Maverick my ass........

WASHINGTON — One of the giant mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain’s campaign manager, according to two people with direct knowledge of the arrangement

Shall we cap nonprofit and educator pay while we're at it?

Way too drastic you ask? Not unless you want to ramp up the migration of corporations and executive talent from America. London and Asia are already awfully attractive in light of our Sarbanes-Oxley debacle and woeful accounting rules. We're at a crossroads already. Until we stop punishing entire sectors of the economy for the bad actions of a few, we're headed backwards and towards long-term flat or sinking wages. Let's consider what it takes to nurture good corporations and keep high-paying jobs here. Most companies aren't evil, Jack. They employ your friends and neighbors.

Wow, whoever you are (anonymous Republican, of course), I think you win Distortion Comment of the Year.

Who says companies are evil? Not I. I say greedy CEO and CFO types who loot companies are evil.

I'm not talking about "high-paying" jobs. I'm talking about obscene compensation levels. If you want to make more than a million for a year's worth of work, then yes, move to Pakistan or India -- see how you like it. Don't let the door hit you.

There will be dozens of perfectly capable people lined up for every $1 million position that you and your friends are too good for.

You can have as many rules as you want..the point is that rules won't matter until people change themselves; until then they'll just keep breaking them or finding ways around them. The same goes for institutions, they're only as good as the people they're composed of.

The bail-out is upside-down.

In a normal transaction, either the company or the valuable assets are bought-up and the valueless assets are left to wither. It's one joy of corporate business structure.

In this case, the Government is buying-up the worthless mortgage-based securities to clear them from the books of the holding institutions and leaving the valuable assets in the hands of those institutions. We can't leave the worthless assets to wither because they'll bring down the financial house of cards. So, instead of buying the worthless assets, why not buy the companies holding the worthless assets, including their good and bad assets. Then, they're all working for "us." Their stock options and Golden Parachutes are Kaput. Their salaries are set by "us." And we have at least SOMETHING, some collateral, and real control.

Wouldn't it be ironic if W presided over the nationalization of the US financial industry.


Buying the worthless junk is not so worthless if you (as the government) would seek to recover not just the amount that was paid to obtain the notes but the full face value of the notes (with penalties and collection costs) and then (just as with student loans and personal pledges that come with SBA loans) claim an offset against anything the citizen might expect from the government, such as Social Security payments or tax refunds. Do not underestimate the bureaucratic power of the federal government to manipulate the bankruptcy code and do such things as preempt state law on most anything that stands in the way of collection, even to the point of declaring that a state law providing for the expiration of a state court judgment is void.

Many states have anti-deficiency judgment laws pertaining to purchase money mortgages. That is, someone can simply walk away from their house, then endure only bad credit (provided that it was not refinanced). Who here would not expect that in the interest of saving the taxpayer's money that Congress would not simply say that state anti-deficiency judgment laws are void, as against a claim by the federal government?

How does this work, in practice? For example:

I recently asked the Federal Department of Education for a copy of their agreement with Sallie Mae as noted in 20 U.S.C. 1078(b). (Section 428(b) of the Higher Education Act of 1965)

"(b) Insurance program agreements to qualify loans for interest subsidies (1) Requirements of insurance program Any State or any nonprofit private institution or organization may enter into an agreement with the Secretary for the purpose of entitling students who receive loans which are insured under a student loan insurance program of that State, institution, or organization to have made on their behalf the payments provided for in subsection (a) of this section if the Secretary determines that the student loan insurance program— " (emphasis added)

The reply I got was that they do not even need such a contract (and by implication that they did not need to look for nor supply me a copy of such contract if one even existed). But I have a copy of the one between Oregon and the Federal Department of Education and know exactly what the requested one would look like. The federal government, in my case, would pay no more than 80 percent of the principal. They have refused to ever reveal (or just admit) the precise amount that was paid. They only reference the face amount on the note.

There is great value in these worthless pieces of paper, in the hands of a vigorous and vengeful government that serves the special interest of the rich and powerful against the peon class. The great struggle, the great never-ending struggle, is whether the federal government's role is to tame the excesses of monstrous corporate entities versus whether it can be coopted to enhance and amplify the excesses of monstrous corporations.

The lesson, from the school of hard knocks, is that the suggestions that bojack offers, and any of a similar vein, must be severed from any purchase of so-called worthless paper and must be addressed directly and independently. Otherwise there will be a net erosion of individual liberty among the peon classes.

The paper has value that is quite distinct from ownership of the companies, in the hands of government. It is not just student loans that get recharacterized as a debt to the government, with enhanced collectibility. It also applies to the "assets" (debts) that were the subject of the financial institutions that where taken over by the Resolution Trust Corporation, or merely transfered overnight to another bank (such as BofA) with a government guarantee of value of the asset. The worthless debts can magically become quite valuable if they are simply resold by the government to a private party, because they would now carry with them the character of a debt to the government, even though that debt would be collected by the new private party. One might try to discover the price that was paid for this retransfer to a private entity, and limit their claim to that amount, but it will likely fall on deaf ears within a court setting and the debtor will be demanded to pay the full face value of any note, to the private party owner, as if THEY were the government. Lest the government guarantee of value would be worthless, and we cannot let that happen now can we? (This last sentence is all it takes for the judge to side -- nominally -- with the government, while in reality they are siding with some well-connected money lender who is boldly demanding unjust enrichment.)

Credit card companies already broke even on their losses by reason of the high interest rates. This is amply illustrated in some shareholder suits, particularly over manipulation of internal stats about default rates so as to justify big bonus pay for the executives. The Paulson proposal would reanimate these old charged off debts too, by recharacterizing them as a debt to the government, which will surely serve to reduce the burden on the taxpayer to cover Social Security payments.

Just think of Paulson's move as a variation of Bush's Social Security agenda. Borrow billions to buy stocks -- with highly paid executives and glorious stock options. Perhaps the rich can tolerate some congressional meddling provided that the big Social Security thing gets hit big time? (At least that is what my skeptical and suspicious mind is dreaming up at the moment.) Everyone with debt that gets laundered by Paulson can sort of write off a portion of their claim to Social Security.

Jack's #2 is problematic. Item (b) is especially so.

I worked on an insider trading case in which the accused inside trader claimed that his massive purchases of put options was simply a "hedging strategy."

Jurors thought that hedges are something you hire Mexicans to trim.

Defendant walked.

"Good riddance. Let's have an options market for those who really need it"

OK, here's my issue - A lot of these contracts are bought like insurance which allows the person holding the paper to accept a lower yield or make it easier to sell.

The issue with now is that a lot of these contracts weren't sold with enough risk premium built in which would have increased their cost and made lenders less willing to take on lower grades of debt.

Just my .02, I'll stick to football.


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