Credit Suisse Traders Manipulated IT Systems To Hide $500m Losses 141
New submitter Qedward writes with a snippet from ComputerWorld UK: "Two traders at Credit Suisse have pleaded guilty to wire fraud and falsifying data after authorities said they had manipulated the bank's record systems, as the credit crunch approached, in order to help conceal over half a billion dollars' worth of losses. The traders admitted to circumventing a mandatory real time reporting system introduced by Credit Suisse, manually entering false profit and loss (P&L) figures as the products they handled collapsed in value. They did so, according to the accusations, under heavy pressure from their manager, who has also been charged."
Regulations... (Score:1, Flamebait)
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...we don't need no stinkin' regulations.....
You are a genius. Let's introduce a regulation against fraud. Hooray!
Re:Regulations... (Score:5, Insightful)
Re:Regulations... (Score:5, Insightful)
You have to actually fund regulatory agencies to notice this kind of behavior.
Re:Regulations... (Score:5, Interesting)
And fund the court system to litigate this kind of behavior. And have some kind of fund to allow poor people to file lawsuits, lest it turns into a might makes right system. And have a system to create, collect and enforce the taxes necessary for this... Kinda like what we have now.
Re:Regulations... (Score:4, Insightful)
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And my point is that as soon as you allow for the fact that basic regulation and taxation is required for any semblance of a government, you're right back in a system that differs from ours only by the priorities of the voting public. I'm happy to discuss what should be a government priority and what shouldn't, but these calls of "government IS the problem" and "government is ALWAYS worse than free markets" are idiotic, completely short-sighted and ignorant of about the last 5000 years of civilization. To m
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care to elaborate on that 'last 5000 years of civilization' part? i am genuinely curious.
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The concept of government is about 5000 years old. Look for the old Mesopotamian civilizations like the Sumerians and the Assyrians. Even at the onset of civilization, people understood that there basic needs for government, that government doesn't work for free, and that the only question about government is what we want the resources to be used for that we provide said government. For the last 5000 years, the need for government to exist, and to include a supporting infrastructure necessary for providing
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first of all, not every libertarian is anarcho-capitalist
second: you seem not to have any idea what Ron Pauls stands for. He is a strict constitutionalist and thus believes in government structures. Decentralization is crucial though: limited federal government (courts, military and coordination of interstate matters) and do-what-you-want states (even if they happen to pass crazy ass laws, though personally he is for as much personal freedom as possible). At least he has the US constitution having his back,
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There are plenty of anarcho-capitalist libertarians who think that you can make courts and the whole justice system private as well.
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If by "democrat camp" you assume supporters of U.S. Democratic party, then that is blatantly and obviously false. Communists have CPUSA.
Contingent Fees (Score:2)
In theory contingent fees solve this problem. A poor defendant can sell a portion of their suit to a rich investor for a upfront payment. Today that is normally the lawyer handling the case. So being poor is not the major issue.
What is the major issue is when the plaintiff doesn’t have the money. One can be poor, hire a good lawyer, but you can’t squeeze Bernie Madoff for money he does not have. (I am working off the assumption that he is telling the truth when he says he spent it all)
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Nah don't worry, they'll report themselves, out of the goodness of their hearts. Or you could trust private auditing companies like E&Y and KPMG which never miss such things.
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It would never even be discovered under the most libertarian business policies.
Last I checked I did not get to vote on how much theft occurred. Taxes are many things, theft they are not. That bumper sticker logic shows how little you really think about these issues.
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It would never even be discovered under the most libertarian business policies.
Under the most libertarian policies, Credit Suisse would be the last place its investors would want to be now. They'd be deserting in droves, going somewhere their interests were actually cared about, not just CS's maximize profits & minimize loss.
Unburdened by onerous regulation and worried about their reputation, wanting to retain their customers, CS might consider it in its interests to spend some cash to actually know what's going on inside.
Regulation doesn't fix this stuff. It's been shown politi
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Under the most libertarian policies, Credit Suisse would never have told the investors anything.
Unburdened by onerous regulation and worried about their reputation, wanting to retain their customers, CS would save money and face by lying to the public.
Regulation is the only recourse. It is not perfect and people do corrupt the system, but it is the only option we have.
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Under the most libertarian policies, Credit Suisse would never have told the investors anything.
Unburdened by onerous regulation and worried about their reputation, wanting to retain their customers, CS would save money and face by lying to the public.
No, that would be fraud. Yes, libertarians do care about that sort of thing, vehemently. CS signed a legal agreement with its investors and should be sued blind for their fiduciary irresponsibility, their board of directors should be sued for negligence and incompetence, and the whole operation should be audited wholesale if it ever hopes to see another penny of investor cash.
Regulation is the only recourse. It is not perfect and people do corrupt the system, but it is the only option we have.
... now. More's the pity. Investor protection left to the whims of political sluts willing to be bought by the highest bidder. Y
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If they never told them, how would they sue?
Might work, is better than provably does not work. Which is what you are suggesting. They already can do those things and they don't.
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If they never told them, how would they sue?
CFO at the annual general meeting: "... and one of our rogue traders managed to lose half a billion dollars in fraudulent trades, so the value of your shares will drop comensurably." Outrage ensues!
They already can do those things and they don't.
They're already gov't regulated. See where that's going?
There's a lot in life that I'd like to see continue sans nanny state gov't, but we don't need impotent, horrifically expensive monsters like the Fed, SEC, DHS, FCC, ... to do them. I believe that'd all be done better by ourselves, not by gov't. With the
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The CFO would never mention it.
They can't be done by ourselves. These banks will never let you see their books. Even if they did you do not have ability nor the cash needed to go after them.
I wish your ideas had a chance of working, but they are as much flights of fancy as a Communist Utopia is.
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The CFO would never mention it.
They can't be done by ourselves. These banks will never let you see their books. Even if they did you do not have ability nor the cash needed to go after them.
You must be under the impression that people like me want to chuck everything out and start again from scratch, like the Soviet Union becoming Russia again. That's not the case.
Every business has regular audits now and there's nothing to prevent that from continuing, and there's plenty of reasons why it should continue. Any business or bank unwilling to submit to such things would soon run out of people willing to invest in it. Word gets around. "Don't trust those guys!"
People aren't stupid, generally s
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Every business has regular audits now and there's nothing to prevent that from continuing, and there's plenty of reasons why it should continue. Any business or bank unwilling to submit to such things would soon run out of people willing to invest in it. Word gets around. "Don't trust those guys!"
You mean like Madoff? No one noticed until it was too late.
People aren't stupid, generally speaking. We can tell the good from the bad, we can vote with our feet, and we can learn from experience. We can also be pr
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Nice a troll for Goldman Sachs.
If you believe that, you need reading comprehension lessons. Those bastards never should have been bailed out BY THE TAXPAYER and ought to be out of business and in jail.
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Bull Shit! Lobbyists are the ones who tweak the regulations not the politicians. Politicians just rubber stamp legislation handed to them from lobbyists.
The toxic asset fiasco was the doing of an UNREGULATED derivatives market. Wall Street got what they wanted, no regulations an
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Re:Regulations... (Score:5, Insightful)
Re:Regulations... (Score:5, Informative)
The thing is, many currently-death-penalty-inducing crimes are often not done while in the clearest state of mine, often in fact, in extreme states of fear or anger/rage or desperation.
Nonetheless, the penalty should outweigh the gain of omitting a crime, by simple application of game theory.
Note: gain here is the result of total gain, minus standard expenses
Normal gain: A
Extra gain from crime: B
Cost incurred if caught with crime: C
Probability of getting caught: f
Now we can calculate the reward:
Gain for not committing the crime (CLEAN): A
Gain for committing the crime (DIRTY): (1-f)(A+B)+f(A+B-C)
which can be rewritten as: A + B - f(A+B) + f(A+B) - f C
Or simply: A + B - f C
Now, for an ideal deterrent, the cost should generally be greater than the benefit, so
CLEAN > DIRTY, or CLEAN - DIRTY > 0:
A - (A + B - f C) = f C - B > 0
Then again, the people making the laws don't really care about game theory or morals or math like this, but rather, who greases their palms with the green lubricant... So why did I even bother?
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The goal should be fC-B>0, but also it should be as close to 0 as possible
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I disagree. The further it is greater than 0, the incentive there is to avoid committing the crime, the deviation from 0 should increase based on how undesirable the crime is.
As I stated, the death penalty typically applied to crimes resulting from a person not thinking at their most rational. In such cases, game theory goes out the window. In such cases, the penalty serves more to permanently keep such loose canons out of society, rather than serve as a deterrent.
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No it places a limit on it that just cannot be increased. This is not the same as infinite. If you are looking at death for your crime, you might as well kill any witnesses. Your failed logic has lead to many murders.
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Some criminal could easily have this thought process:
"Life sucks. I could kill myself, or rob a bank. Might as well die, robbing a bank."
Also, there are certain mental states that make it impossible to consider getting caught. Remember Bill Clinton. "I may be the most powerful person in the world, but I'd give it all away to have sex with a moderately attractive big-haired intern". Bill was so narcissistic and powerful that he literally could not imagine being cau
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If I was religious, on the other hand, eternity in hell means that the cost is effectively infinite, even for stealing a single penny.
Strange how drastically your interpretation of the world changes when t
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Sometimes, when I look at what are current system is, I think Hammurabi [wikipedia.org] was onto something...
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Sometimes, when I look at what are current system is, I think Hammurabi [wikipedia.org] was onto something...
Here's how to make sure this doesn't happen again, take these asshats, handcuff their hands to their waists and condoms on their back. Drop them into a maximum security prison with plenty of Vaseline tubes, then tape the entertainment for future stock traders. If these money-men want to screw over the general population, then let the "general population" screw them.
Kill the killers, rape the rapists, terrorize the terrorists.
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I wasn't arguing for the death penalty, I was just arguing for stricter penalties in general for some of these crimes.
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I wouldn't call it so much revenge as removing from society people who clearly have no intention of abiding by common rules of civility.
One doesn't need a religious edict to know that killing someone for their wallet is something you don't do or that raping anyone is acceptable.
While I wouldn't condone the death penalty in this case, there are numerous cases where the person has had numerous run ins such as burglary, assault, drunken driving, etc where it's obvious no amount of jail time will make them chan
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homocide
Now thats a hate crime!
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Revenge can be sweet, but if your objective is deterrence, forget about the death penalty. There's plenty of evidence that it's ineffective.
...as currently practiced. If it takes 10-20 years to carry out, is done in virtual secrecy, etc., then yes, it's ineffective. On the other hand, if you eliminate the galactic stupidity of our appeals system so executions are carried out reasonably soon after conviction and you do it via public crucifixion or other visibly unpleasant, witnessable method, then deterrence is quite effective.
And frankly, even if there is no deterrence, the justice factor alone makes this kind of reform essential. If someone
Re:Regulations... (Score:4, Insightful)
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If someone killed a member of my family, I would want them crucified
What if he were later found to be innocent? You're going to say, "oops sorry, my bad"? or shall we crucify you too, for the sake of justice?
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Manipulation? (Score:5, Insightful)
Even banking systems have to obey the cardinal rule: Garbage in, Garbage out.
Re:Manipulation? (Score:4, Insightful)
http://consumerist.com/2011/06/how-hackers-stole-200000-citi-accounts-by-exploiting-basic-browser-vulnerability.html [consumerist.com]
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But how do you define or measure "things that were unintended by the original designers"? As a general concept, how do I know beforehand that what I am doing is unintended?
The guy who invented glass probably never intended it to be flown at thousands of miles per hour in outer space. He probably never intended it to be used as a keyboard on an iPad. So, does that mean that those applications are illegal or immoral?
The URL hack was immoral because once the information was viewed and understood to be priva
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Having worked with stuff like this. (Score:2)
Pricing bonds, especially subprime bonds, it a bit of an art. The market is huge, but the chance that the exact bond you hold is rare
Let us say you hold a 9 year IBM bond. The 5 year bond and 10 year IBM bond traded, but not yours. What’s the price? You would base it on “observable, Level 2” inputs – basically taking apart the value of the bonds and putting it back together.
For subprime bonds, it may be nothing like you bond has traded for months. They are customized things, or
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Technically a URL hack is a hack, even if they're blindingly obvious sometimes.
Re:Manipulation? (Score:4, Insightful)
Whether or not it embarrasses the owner/seller of the system.
In this case, (where a multi-billion-dollar investment bank's anti-fraud system apparently allows the people it is supposed to be monitoring to just manually enter the data that the system is supposed to be verifying) it would be terribly embarrassing to People Who Matter to describe the situation in more honest terms. If anything, the fact that the 'manipulation' hasn't been described as 'highly sophisticated' and the accused as a 'hacking expert' is the surprising bit.
Were the shoe on the other foot, and this system were something being sold commercially for use in all sorts of important places(SCADA systems, say) it would be dreadfully impolite to say that it had been 'manipulated', much less(heaven help us!) 'hacked' or 'exploited'. No, it would, just naturally, be vulnerable to malconfiguration by insider threats.
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I don't think putting incorrect data into the software can really count as manipulating the IT system.
Even banking systems have to obey the cardinal rule: Garbage in, Garbage out.
Intentionally putting in incorrect information ... however ... is a time-honoured tradition in business.
"manually entering false profit" (Score:1)
http://www.youtube.com/watch?v=DdF76QhVEFE#t=22s [youtube.com]
Comment removed (Score:5, Interesting)
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"Regulation" is a meaningless term. There are useful regulations (be able to cover over half your debts at any given time) and damaging regulations (skip credit checks and background checks).
The danger of regulations is not that some exist, the danger is that some people will attempt to micro-manage everything if given a chance, and a few will try to micro-manage in fraudulent ways through oddly worded legalese in what appears to be a reasonable law.
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The amount of losses caused by government enforced loans to minorities are an infinitesimal part of the mortgage losses, most bad performing mortgages were granted because they could be sold on for short term gain with credit rating agency collusion, not because of government force. Unless you like hockeystick theories, blaming the MBS's fiasco on government is insane.
Your first example of good regulation is actually micromanaging. It acknowledges that the incentives for "banks" (rather bankers) are to inco
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They were sold on to government chartered non-profits (Freddy and Fannie).
Ignoring the fact that the government setup the secondary mortgage markets and wrote the underwriting rules is an example of selection bias.
You only want to focus on the unregulated aspects (derivative markets) while ignoring the miss-regulated aspects. Not unregulated, miss-regulated.
Mortgage markets are heavily regulated in the USA. Miss-regulation is the worst part of regulation.
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They underwrote a lot of the mortgages ... but they didn't underwrite the majority. With TARP you could have bailed them out whole.
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doesn't matter, Freddie and Fannie were an important part of the perverse incentive structure. Implied government guarantee turns everything upside down.
You earn more money when you give loans left and right and peddle them to the government with infinite funds than when you are cautious and prudent.
Also if you don't participate in that death race, you lose business; investors leave because the other guys offer better returns.
Flooding market with money to stimulate economy didn't help maintain sanity either
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The lax underwriting standards were written into the regulations.
Like I said miss-regulated.
Re:Australian banks (Score:5, Informative)
we too narrowly avoided that shit here in turkey too. strict controls and standards were placed after 2001 liquidity crisis.
but, american government was pressuring the american backed islamist party here, to remove those regulations, so that there could be 'competition'. the street speak is, banks like Merrill lynch, goldman sachs were just wanting to enter turkish market to peddle their scam there. the economy minister here had had already started to babble about the issue, trying to make ground for the changes they were demanded by u.s., citing various run-off-the-mill right wing catchphrases about 'competition, free market' and whatnot. and those two banks had had already set up their first hqs in istanbul.
a month later, wall street scam had came out into open. and everyone shut up. bank-wise, turkish banks stayed as they were, intact. economically everyone got affected from the worldwide crisis though.
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Now some might say "Just think of what they would have been able to do with even LESS regulations!"
- that's the proper question, but it's incomplete.
Think about what they would be with less GOVERNMENT regulations!
The only real regulations are capital requirements that force banks to be risk averse by default, and no amount of government regulations does that, on the contrary - the Federal reserve of USA states that one of its goals is to ensure that people take MORE RISK than they would otherwise take in the market, which is obviously regulation and it's hurting the economy and it's done with counterfei
Re:Australian banks (Score:5, Insightful)
Your argument assumes that bank employees do what is good for the bank. The last fnancial crisis has showed that this is simply not true. The excessive compensation schemes put in place at banks have disconnected what is good for employees from what is good for banks.
Huge bonuses were obtained by employees for deals that were very bad for the banks. Enough money to retire was paid in bonuses in a couple of years, so why would those employees care about the long-term health of the bank? External market pressures won't change that dynamic -- banks have to reform their compensation schemes.
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You are assuming that it is possible for bank management to do what they did without government backing them with free money and various regulations, that required them to give out much riskier loans than what they normally would give out if they didn't have either government backing in the money or regulations.
All of those huge bonuses, etc., it's all only possible when there is a huge government put on all those terrible risky loans that banks give out and it's prevented from ever happening with real mone
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I didn't know I had 'sock puppets', but whoever moded me up must find this extremely amusing.
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just because you don't recognise a meaningful post doesn't mean nobody else does.
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"Some regulations are good, so ALL regulations MUST be good."
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The top 4 now rank within the TOP 12 in the WORLD.
According to this article [relbanks.com], which ranks banks in 2011 by assets, the largest Australian bank made 36th place and only four Australian banks placed in the top 50.
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But thanks to heavy regulation, the Aussie banks steered away from bad debts, and therefore were relatively immune from the collapse.
Canada has had a similar experience. Which just goes to show that regulation is not bad in and of itself - the pertinent question is whether it's the right kind of regulation, or not. Like any other tool, it can be used for both good and evil things - and then it also depends on who you ask. A functioning democracy is supposed to be the mechanism by which we decide such matters.
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Yes, America has a messed up tax system, no pizza being categorized as a vegetable has nothing to do with the tax system. That is just... the fuck?
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Look at the americans, they have laws that say pizza is a vegetable, that's how messed up their tax system is.
I don't know about the tax system, but frankly, I'd rather have the American education system than whatever they're teaching you about taxes.
Post-onset (Score:5, Interesting)
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Here are the possibilities:
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By the way, there exist counterexamples to your statements. I work in the industry and have seen coworkers fired for taking unauthorized, but profitable, risks. There's no criminal prosecution in those cases of course, but the consequence of di
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I work in the industry and have seen coworkers fired for taking unauthorized, but profitable, risks. There's no criminal prosecution in those cases of course, but the consequence of dismissal was at least there. I have also seen such cases with small losses where the guy was fired but not prosecuted.
Not prosecuted, but also not publicized in both cases.
Why did your coworkers take the unauthorized risk in the first place, seeing as they would get fired, profit or loss? Seems more a case of stupidity, rather than malicious action.
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Why did your coworkers take the unauthorized risk in the first place, seeing as they would get fired, profit or loss? Seems more a case of stupidity, rather than malicious action.
Fair question, and I don't have an answer. It only happened twice, and all I can think is "people do crazy stuff".
To put it in undying words of Alan Greenspan (Score:4, Informative)
"I dont understand why corporations didnt regulate themselves ...." (Alan Greenspan, in front of senate inquiry committee on wall street scam)
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Why wouldn't they?
*Why would they Need an edit button =\
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Did you stop to consider that maybe he WAS aware of human nature, and his response was a sarcastic dig at the Republican and Corporate statements that government Regulation isn't necessary...that the Companies will regulate themselves?
are you aware that the person quoted is alan greenspan, the leader of the holy church of free market since reagan era, the advocate who had caused all this 'deregulation' to happen over 2 decades in the first place ?
he reigned over u.s. economy for around a decade and more. all this deregulation is the result of his advocacy and his own doings.
Tip of the iceberg (Score:5, Interesting)
There's only one regulation that's really needed (outside obvious fraud), and that's a conservation law a-la momentum. You want more money? Well you're either going to have to achieve it by taking it from somebody else or by creating new resources through mining, manufacturing or man-hours etc. I'd like to see the hypothetical world-wide balance sheet for the last couple of decades, because I bet it would fail the most simple anti-fraud tests.
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or man-hours
What do you think is the result of productivity times man-hours? That's EXACTLY the reason why the Gold standard was abandoned: with it, you'd never be able to expand the economy through more productivity. The size of the economy would be shackled by how much gold is in circulation.
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That's EXACTLY the reason why the Gold standard was abandoned: with it, you'd never be able to expand the economy through more productivity.
That's not correct. The gold standard was abandoned because the government was a net debtor. With a fiat currency they were able to inflate it at will and pay off their debts with worth-less money. Plus, they got to spend the newly created money first.
The size of the economy would be shackled by how much gold is in circulation.
That's not correct. In general, prices
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That's not correct. In general, prices would fall (the price of gold would rise in terms of the amount of goods and services it could buy) and more could then be bought with the same mass of gold.
I said shackled. I'm very well aware of the deflationary pressure that a gold standard brings, and so is every current economist, and so was everybody at the Bretton-Woods convention when the world decided to move away from the gold standard. And that deflationary pressure - and it's deflationary impact on the overall economy - is exactly part of the set of reasons why the Gold standard was abandoned.
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I'm very well aware of the deflationary pressure that a gold standard brings,
Gold standards don't necessarily bring deflationary pressures. In 1848-1855 it brought inflationary pressures to the United States after the discovery of gold in Sutter's Mill, California, and then again after 1887 when John Steward MacArthur of Scotland discovered the cyanide process for gold.
and it's deflationary impact on the overall economy
"Deflation" is a term applied to the money supply, and , more recently, to the general l
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In 1848-1855 it brought inflationary pressures to the United States after the discovery of gold in Sutter's Mill, California, and then again after 1887 when John Steward MacArthur of Scotland discovered the cyanide process for gold.
Absolutely. I wasn't arguing that it always did, but that the gold standard can cause deflationary pressures under specific circumstances.
The term used to describe an economy that is receding is recession or, if it's major, depression.
Point taken.
Recession cannot be the effect of an advance in the expansion of the economy (our original topic) together with static levels of gold while on a gold standard.
True. However, you are assuming that the economy is advancing, and that therefore, it cannot contract. What I am arguing is that any trends that would normally lead to an expansion of the economy (improvements in productivity, for example) immediately lead to deflationary pressures that counteract the expansion of the economy. In case of economy-wide productiv
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The problem w/ such a system is that one runs short of liquidity and it significantly curtails the ability to do business --- which arguably is a benefit as well, since slowing down financial transactions would help somewhat w/ stability.
What happens when a company like Nintendo takes 100 developers over 5 man years and creates something like Legend of Zelda: Skyward Sword --- if people don't have the liquidity to purchase it, one doesn't get an additional valuation for goods of 3.28 million * $50 (disregar
Transactions with real electronic cash (Score:2)
What we need is exchange transactions made with electronic signed cash species. Actually, transactions revolves around pure arithmetic and thus permit this type of frauds by creating more virtual fictional money with no real value.
If we could have signed species objects made of {{serial#,amount,emitter},emitter-signature},owner},owner-signature}, transactions made by signed clusters of species objects. No one except countries, central banks authorities would be able to electronically sign the species with t
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You want more money? Well you're either going to have to achieve it by taking it from somebody else or by creating new resources through mining, manufacturing or man-hours etc.
This is interesting to me, especially the man-hours bit. A friend of mine recently brought up this idea in a discussion we were having about what a viable economic system alternative would be if someone like Ron Paul was eventually elected. The system he described still had government creating money (i.e. not based on gold) but it would be used to pay for public works (road improvements, parks, interstate mass transit, etc). Taxes would still be collected but the money collected would either be taken out
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This is exactly what new regulations like Basel 3 are addressing. In short, banks need to have a certain percentage of capital to backup any financial objects they create. In other words, with this regulation you can no longer just create money out of thin air.
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Long History (Score:1)
Banks in Control of their Destiny? (Score:2)
Given all the issues with both hacked outside and inside manipulated complex IT systems in banking, I am surprised more banks haven't collapsed.
The mentality in the trading operations actually is a psychological statement that the bank is greedy and wants every penny it can wring out of trades and they think that doesn't affect their workers.
Hot tip: Where the finger should truly be pointed (Score:5, Informative)
Disclaimer: I've got a Master's in Finance from a top university, hold a highly recognised multi-year professional qualification and have spent several years in the industry. Not primarily risk management or macroeconomic oversight, but I know enough to see the issues.
A lot of what is said about banks and bankers and contributions to "the financial crisis" is plain bunk. I'm not going to point out specifics here.
The one area where a finger should be pointed, and largely hasn't, is the enormous pressure that has been exerted to lower capital requirements.
Effectively it works like this: A bank doesn't create money out of thin air (in spite of what untold millions of crazies think - only the banking system does). Every dollar it lends out, it has to borrow. The bank's balance sheet consists of assets that interest is generated on (the loans it has made, interest-paying bonds it has purchased etc.) and liabilities that interest is paid on (the bank's own short term paper, the deposits people have placed at the bank, various other funny ways to borrow money).
Effectively, for a 'simple bank', the money that the bank makes is the margin between the two.
There is however a problem: what is some of the bank's assets disappear? In other words, what if someone who has borrowed money and promised to repay it, can't? The bank still has to repay its own liabilities. Suddenly your assets are 90m and your liabilities are 100m and you are effectively insolvent. The people the bank owns money would get only 90 cent on the dollar.
Which is why banks have a capital buffer. The 'equity' of the company. The only thing the shareholders really own and generates returns for them. If you have a capital buffer of 20m, then in the example above, your capital buffer would be cut in half. Equity owners take the first loss. The bank's creditors doesn't suffer.
Now, the calculation of shareholder returns is effectively the interest margin, in absolute monies, applied to the equity. So-called Return on Equity. For example, if you lend out 100 at 5%, borrow 100 at 3%, that gives you gross income of 2. If your equity is 10, that implies a 20% return e.g. that can be paid out as a dividend.
Increasing the size of a balance sheet is extremely easy. You can just give tons of risky loans at medium interest rates, and get funded by borrowing at slightly lower interest rates. This means if you e.g. have 10m, you could start a bank that immediately borrows 100m, lends 100m, and generates you 2m per annum. Quite a decent rate of return compared to other investment options.
This means that the amount of capital required is of _extreme_ importance. If you are required to hold 10% of your total loans/debts in capital, then in the example above, starting a bank with 10m lets you lend 100m and borrow 100m and make 2m per annum as described.
If this requirement is lowered to 5%, you can do one of two things: you can suddenly crank up your lending and borrowing to 200m, still generating a gross margin of 2% (now 4m per annum), which doubles the returns on your investment from 20% to 40% per annum. Or, you can start a bank with 5m instead, lend/borrow 100m, and generate a 40% RoE still.
There has been an enormous pressure from banks and investors to reduce capital requirements. This has been pushed along and justified with models, for example, that says that bankruptcies (assets disappearing) are not correlated with each other, so if e.g. you have 100 borrowers that each borrow 1m you only need to hold 2m in assets because it's statistically very very unlikely that more than 2 of these go bankrupt each year.
What happens if the model breaks down and 3 borrowers go bankrupt at the same time, e.g. in the housing market? The bank falls over. It's not simply a matter of injecting 1m, because an enormous legal mess occurs, other suppliers of capital to the bank run away fearing bankruptcy meaning that the bank has to recall loans to repay them (which it can't), etc.
Here comes the crucial par
They made a simple mistake (Score:2)
Go Big or Go To Jail.
Re: (Score:2)
Re: (Score:2)
Gold has no inherent value, but cannot be easily gamed.
For certain definitions (Score:3)
Gold has no inherent value, but cannot be easily gamed.
Well, for certain definitions of "easily". Quoting from http://www.fgmr.com/move-over-fisk-and-gould.html [fgmr.com] we read that a manipulator (ironically named Gould) did just that:
In 1869, Jim Fisk and Jay Gould tried to corner the gold market, and for a time, this notorious duo succeeded...When Fisk and Gould started their manipulations, gold hovered around GB$130....Gould got some newspapers to help him in his task by printing stories that a gold squeeze had begun. By Thursday, gold had risen to the low GB$140’s, but the real fireworks began the next day, September 24th, what has become known as Black Friday... Many faced ruin as gold began to soar, and the margin calls began to mount....The gold price had risen to GB$162, when James Brown (who with his brother took over the firm started by their father, which exists to this day as Brown Brothers Harriman) stepped up to the plate. He sold 250,000 ounces to a Fisk and Gould broker at GB$160
Re: (Score:2, Informative)