Charlie Rose

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Barack Obama  10/30/2008 09:55 AM Report

If all you white-supremist racists and black Afro-centrist racists could just turn your maturity level up just a notch, you would realize, that I, yours truly, may be chocolate on the outside, but vanilla on the inside, AND! I, may be vanilla on the inside, but chocolate on the outside... And ewy gooy rich and chewy for all you jew-eez... Now how do you like dem apples?! And have a happy halloween... Don't get SPOOKED! LOL!

Preston  10/28/2008 06:10 PM Report

Oh, so that's what it was. Well thanks for clearing that up, Mr. Heller... I have a petite asian lady here for you, who says, "You so smot."

Joseph Heller  10/28/2008 05:31 PM Report

The results of all CDS auctions are on www.creditfixings.com.

Re Turner's estimates. He is high. He estimated $400 billion notional for Lehman. The actual notional was $72 billion. (on DTCC's website). The net notional was much lower... thus the $5.2 billion actual loss/gain in Lehman CDS.

sock puppet  10/28/2008 05:17 PM Report

Thanks Prof. Heller for staying after class for our one-on-one. Took your FT suggestion to Google U. link: http://www.ft.com/cms/s/0/59477edc-7f5f-11dd-a3da-000077b07658.html -------------------------------> Copying three paragraphs that seem to demonstrate your gratuitous lessons in CDS (voodoo) finance.

_____________________________________________________________________________________________________ _____________________________________________________________

Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200bn-$500bn of outstanding CDS and other credit derivatives referencing Fannie and Freddie.

_____________________________________________________________________________________________________ ______________________________________________________________

This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25bn of CDS.

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Currently, the recovery value of the Fannie Mae and Freddie Mac CDS is expected to be about 95 cents in the dollar, leading to a potential 5 per cent loss for insurance companies or banks who offered protection against a default. On CDS worth $200bn-$500bn, losses would come to $10bn-$25bn.

_____________________________________________________________________________________________________ ____________________________________________________________

A useful exchange for me. (And with luck perhaps an onlooker or two.) Thanks for your indulgence. That and $2-$5 might get you a cup of coffee. Mail my grade to the group home for the financially (and politically) bewildered. Cheers! Afterthought, be wary of bear traps.

Joseph Heller  10/28/2008 02:08 PM Report

Sock Puppet:

Your questions with answers

(1) you seem to be holding CDSs as innocent instruments apart from mortgages. But weren't they part of securitized secondary marketing of collateralized debt obligations (cdo), sold in graded tranches overrated AAA by Moody's et al? A 'swap' instead of 'insurance,' to avoid reserves?

CDS could be part of a synthetic CDO. This is a relatively small part of the market. It is mostly cash CDS made up of cash instruments (i.e. assets are mortgages, corporate bonds or corp loans)

(2) How were these marketed around the world at the volume they were if they weren't 'nominally' insured with swaps?

CDS provides protection on a specific issuer. Insurance on a particular bond has been around for decades. It started with insurance on muni bonds as a particular investor may for tax purposes want to buy all New York munis... but they investor is concerned that they have no diversification. Reinsurers (AIG anyone?) would provide insurance on the Muni bond and the investor has diversification by means of the insurance. The Reinsurers expanded this model to cover Mortgage Back bonds even though there was no overriding tax justification as in Munis for them to do this. It did not turn out well for them.

(3) Finally, if the $34.8 trillion in CDSs are not a derivative of mortgages what are they tied to? Derived from? They are largely derivatives off of bonds of Corporations. To a lesser extent Governments. Again it is not a specific bond but bonds of a certain type of a particular issuer (e.g. subordinated bonds).

(4) How can the rest of the media be so gulled? Sixty Minutes? WSJ? NYT? They are either intentionally scaring people/creating high interest stories by calling notional value the value or they do not understand themselves. An interesting thing about the 60 Minutes story… They compared the CDS market to people gambling on an NFL game. But they went far further by claiming that these “side bets” affected the game itself (i.e. caused a global credit crisis). Where is the evidence? Is just throwing around an inaccurate $60 trillion notional value the evidence? If you are going to claim that side bets affected the outcome of an NFL game, aren’t you going to have to provide more evidence than the size (inflated or otherwise) of the side bet? Aren’t you going to have to have some smoking gun? All that you got from 60 Minutes is a reference to 1907 Bucket Shops and analogies to gambling. Where is the specific evidence that side bets on the credit market caused a global credit crisis?

You would think that the biggest evidence that these “side bets” affected the game would be if the dealers that underwrote these losing mortgage backed bonds were now doing fine because they off loaded the risk to unsuspecting investors by using CDS. There isn’t a single bank that was significantly involved in mortgage backed securities or direct risky mortgage loans that isn’t getting hammered in this market.

In terms of media, the Financial Times is the only major publication that has followed CDS for any length as the first significant CDS volume started in London. If you want to better understand CDS, read FT.

the real Preston  10/28/2008 09:15 AM Report

Comment by Preston?!... I don't think so... MARION!

Preston  10/28/2008 09:13 AM Report

Now I hear John McCain gonna try and STOP, us poor folk from enjoyin them CDs, like deh rest o dem evil white folk. By going after those hod workin lobbyists tryin to unshackle the poor colored folk so we can vote foe change! Well don't chuh worry Miss Hillary, Barrack Obama gonna STOP dem evil white boys! So we can ALL have dem CDs dat all you white folk be talkin about. Thank ya miss Hillary.

Marion Berry  10/28/2008 08:47 AM Report

Hillary!... You know I one uh ya most ardent supporters?. How about you get me some uh dem CDs all you white folk be talkin about?.

Marion Berry  10/28/2008 08:37 AM Report

CDSs was created by duh Democrats?!, Damn, day must be GOOD!... Does anybuddy know where I be get some uh dat?

Preston  10/28/2008 08:31 AM Report

Actually, one can argue, it was real human greed MASKED as liberal ideological intentions. In the case of the Clintons and other ROYAL assholes.

Preston  10/28/2008 08:14 AM Report

Yes, sock puppet, as long as the bubble balloon just keeps growing bigger and better with no end in site with a life of it's own, it would be unreasonable to assume that the administrators who inherited it from the inventors who created this wonderful balloon that fascinates all the wide eyed children, should just stop it in the middle of the show and gradually let the air back out of it. Yeah, like that's gonna happen. Like the inventors (Liberals, banking lobbyists, Barney Frank, Phil Graham?) would have let that happen. Not to mention all the children with they're new toys. Like I said, in another post. Liberal ideology mixed with real human greed is what did it. And that's why I'm voting McCain. A lesser of 2 evils. So be it.

sock puppet  10/28/2008 02:37 AM Report

Preston - yes unbelievably all the enabling legislation was done under Democrats. Much of it under Clinton. Also much of it appeared to include repealing of outstanding laws and regulations. And Obama sleeps with the same ilk, a la Citigroup ex CEOs, Robert Rubin, Clinton's Sec of Treas. on and on. The venality and corruption under the next eight will make the prior eight a wistful walk-in-the-park. McCain (for all the wrong reasons) under his maverick role may have gone a little way in cleaning up. But just as a cathartic purge of Bush-Cheney didn't happen the disciplining, trial and incarceration of the financial wise-guys will not even be broached under an Obama administration. The system will suffer longer for its lack. Confidence will lag for each year the wise-guys smirk up their sleeves in their gated communities and Bahama tax havens. The abject poverty and misery their predatory practices have created and continue to do deserve all the retribution we have available. But alas they are already setting aside billions for the wise-guy year-end bonuses. Dante where are you when we need you?

sock puppet  10/28/2008 02:07 AM Report

I'm too obtuse for this exchange as: (1) you seem to be holding CDSs as innocent instruments apart from mortgages. But weren't they part of securitized secondary marketing of collateralized debt obligations (cdo), sold in graded tranches overrated AAA by Moody's et al? A 'swap' instead of 'insurance,' to avoid reserves? (2) How were these marketed around the world at the volume they were if they weren't 'nominally' insured with swaps? (3) Finally, if the $34.8 trillion in CDSs are not a derivative of mortgages what are they tied to? Derived from? (4) How can the rest of the media be so gulled? Sixty Minutes? WSJ? NYT?

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I hope you concede that without the downstream secondary market the mortgage crisis would not have evolved. Each respective bank would have to hold their own and make responsible loans. The so-called securitization and wholesale packaging set the system loose. CDSs were creatively invented by the financial wise-guys as a way of 'hedging' their positions. Finally, are you an arbitrager of sorts? Do you have a vested interest in the 'reputation' of CDSs? Are they a good thing in your view? Should they be regulated "in" or "out?" More or less? This is moot really. The crisis seems real enough - with or without CDSs. I think I'm circling myself. I grow weary. Feel free to tell me to get buffed and buy a call on the DJI index. Cheers!

Preston  10/27/2008 07:20 PM Report

So this CDS thing started in year 2000. Years 1998, 1999 Clinton administration and Congress people started their pressure on Fannie Mae and Freddie Mac to start relaxing mortgage standards to the poor and or unqualified... The pieces of the puzzle are all starting to fit.-------------- Did you hear that journalists?! Do your damn jobs!

Joseph Heller  10/27/2008 06:53 PM Report

The Warehouse has the majority of CDS trades. Currently 90%+ of CDS trades are in the Warehouse and ultimately there will be (near) 100% of CDS trades are in the Warehouse. Why? Regulatory demand.

The $34.8 trillion notional value in the Warehouse is the best number you can get. The $60 trillion notional value estimate overestimates by double counting. The DTCC web site points out the problem of double counting in earlier estimates.

In terms of CDS referencing mortgage back securities, the less than 1% figure in the Warehouse is correct. There are a few more exotic mortgage related CDS that are not in the Warehouse but CDS is relatively very small in mortages.

Your question seems to be "If CDS on Mortages are only 1% of the market and CDS caused the global mortage crisis, how big is the crisis that CDS has caused to the Corporate Bond market?"

I respectfully suggest some questions that you might ask... "If the entire CDS market is $34.8 trillion notional value... and CDS related to Mortgage Back Securities is less than 1% of that (or under $350 billion notional value)... and actual value even in a default is a fraction of the notional value, did CDS really cause the global mortage crisis? Did banks really make these poor credit decisions because they thought that they could recoup pennies on the dollar of their losses in CDS related to the mortgages? Or... perhaps... did banks lend money to people that could not pay it back as they erroneously assumed the bank would be covered as real estate values never go down?"

sock puppet  10/27/2008 06:09 PM Report

Joseph - went to your site. Saw your referenced source. Here tis: "When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported “sides”) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents)." _____________________________________________________________________________________________________ _______________________________________________________________

The parenthetical bit throws me. Are these the side-bets sixty minutes referred to as casino-capitalism? If so could they account for the $25 trillion difference between the $34.8 and the $60 trillion (notional?) figure?

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Also, this from fourth paragraph is a non sequitur or irreconcilable with published reports: "Less than 1% of credit default swap contracts currently registered in the Warehouse relate to particular residential mortgage-backed securities. Mortgage-related index products also have some components relating to residential mortgages and, as a whole, also constitute a relatively small fraction of total credit default swaps registered in the Warehouse." ----------------> If that's the case, isn't that bad news? Namely that there are instruments in trouble other than mortgage backed derivatives? Virtually 99 times more? What am I missing? They keep qualifying it with "registered in the Warehouse," is that the explanation?

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Are we solving the wrong problem?

Joseph Heller  10/27/2008 02:04 PM Report

Sock puppet...

The notional size of $60 trillion for the CDS market is overstated. The actual number is $34.8 trillion. The $60 trillion number is based on surveys where the same position is counted twice.

http://www.dtcc.com/news/press/releases/2008/tiw.php?lpos=hp_slot2&lid=oct08_cds_misconceptions

Second... you can't take the Lehman ratio and apply it to the over all market. Lehman was in default (the overall market is not) and had an exceptionally low recovery value (in default most bonds are worth more than 8.625 cents on the dollar).

When CDS contracts are first made, the value is zero. Overtime the value changes as the perception of the credit risk changes. Estimates that I have seen indicate CDS contracts are currently worth 4% of notional average or $1.5 trillion. ($38.5 trillion x 4%).

It is important to know that is the value. That does not mean that there is a group of really smart/lucky people on one side of the trade that get $1.5 trillion from a group of uninformed/unlucky people on the other side of the table. Investors buy and sell CDS. The $1.5 trillion represents the amount of money that has changed hands. The same investor has both won and lost some of that money.

sock puppet  10/27/2008 01:09 AM Report

First of all thank you Joseph Heller (aka Irwin?)! I've been in a catch-22 over these Credit Default Swaps since first hearing about them. Deriving the net of the flouted $60 trillion has been elusive, as more on the dim side of the porch lights. Went to your cited sight: http://www.dtcc.com/news/press/releases/2008/dtcc_processes_lehman_cds.php ----------------------------------------------------------------------------------------------------- ----------> The last two sentences of the third paragraph copied here: "For Lehman Brothers Holdings Inc. the calculated amounts netted in the Warehouse on a bilateral basis amounted to approximately $21 billion. The $5.2 billion net funds transfer represents the net of these nets." ---------------> Now is it fair to divide the $5.2/$21 billions, to obtain a 25 percent ratio? If so would the same ratio hold for the $60 trillion, which would produce a net net of $15 trillion? When your talking trillions any number can represent some real money. ----------------------------------------------------------------------------------------------------- -----------------------------------> And the principle overrides the principal. None of this CDS speculation should be underwritten by the taxpayer. Gambling with OPM, especially ours, is anathema. Lastly there is a reverse to your net spin where the loss exceeds the debt. To wit: "It is possible for a company to have a $100 million dollar outstanding debt and $1 billion of CDS contracts outstanding(side bets - added by me). In a default the investors holding the CDS could loose the $1 billion even when the actual debt was only $100 million. This is how the systemic risk is created through these investments." So I am by nature not sanguine enough to accept your ending premise: "They were just plain wrong on the credit markets. They lent money to people that could not pay it back. It isn't more complex than that." ----------------------------->Would it were that easy. The netting out example has some merit of course, but it has the potential (strongly) of going the other way as well because of the side-bet systemic risk. You need not have any investment of any kind to place your bet. Sixty Minutes referred to it as Casino Capitalism. With a preponderance betting on the downside (which is likely) the NET payoff could be huge. Further, there still needs to be thorough confidence building investigation of all this. The FBI, SEC, Congressional oversight. Rewarding them with the cleanup and the administration of the bailout is blatantly criminal in itself. Banks are already buying banks (with our money) rather than lending. Egregious greed and obscene corruption merely getting started. Thanks for trying. Skepticism is just my bent.

sock puppet  10/26/2008 11:27 PM Report

Preston - poignant reference.

Joseph Heller  10/26/2008 11:22 PM Report

You are missing two key points..

1. You are confusing notional value with value. Notional value is the size of the contract. Think of CDS as insurance. If you get a $100k insurance policy on your house, no one is going to pasy for $100k for it. It's value is close to zero as the premiums that you pay are roughly equal to the risk the insurance company has that your house burns down (plus some profit for the insurance company).

Comparing the notional value of the CDS market to the value of the stock market is comparing apples to oranges.

2. No one both buys and sells insurance on their house. Investors do both buy and sell insurance on the same company in the CDS market. This leads to very large notional values but the notional value collapses by more than 90% after a default as these contracts cancel each other out. (See Lehman example below)

3. While the notional value of the CDS market may be greater than the bond market, the value of the CDS market is no where near the value of the bond market.

The best example of this is the recent Lehman Brothers default. The amount of notional value of CDS on Lehman Brothers was $400 billion. The bonds on Lehman Brothers were auctioned off at a price of 8.625 so people thought there was $365.5 billion ($400 billion x 91.375%) lost on Lehman CDS. Wrong answer.

http://www.dtcc.com/news/press/releases/2008/dtcc_processes_lehman_cds.php

After a default, the notional value of CDS collapses dramatically as the same investor has both bought and sold CDS.

The actual amount lost (and gained) on Lehman CDS is on the DTCC web site. It was $5.2 billion... less than 1/20th the amount lost on Lehman bonds.

Once you accept that notional value is not actual value and that the amount lost on CDS is a very small fraction of the amount lost on the bonds, you are forced to discard the belief that banks willingly took these risks simply because they could make back 5% of their losses in CDS.

They were just plain wrong on the credit markets. They lent money to people that could not pay it back. It isn't more complex than that.

Preston  10/26/2008 08:22 PM Report

Saw 60 minutes, WOW, UNBELIEVABLE... Yes Billy Joel, it looks like, we did start the fire.

sock puppet citing that Sixty Minutes tonight had a great summary on the CDS fiasco. They cited the Commodity Funds Modernization Act 2000. -----> Under the Commodity Funds Modernization Act 2000, which was part of a 262 page amendment to an even larger a  10/26/2008 07:50 PM Report

.

sock puppet  10/26/2008 06:41 PM Report

Thanks Preston. I tried. Surprising outcome in summary. Give the programmers some job security.

Preston  10/26/2008 06:33 PM Report

Congratulations sock puppet, you've managed to get your poop on everything. Again.

and message approved by sock puppet for the hoped for preservation of fiscal, monetary and economic sanity. FAT CHANCE! Beating a dead pachyderm here because it is too big to continually ignore. $60 trillion too big ($200,000/capita)! This ignored Achil  10/26/2008 06:27 PM Report

.

Moez  10/26/2008 03:15 PM Report

I read about Mr. Smick's book in an article by David Brooks in NY Times. Listened the whole book. It is quite amazing and his objective analysis not to mention the layman approach of the book helped me understand the true nature of globalization - how it works. The impact of globalization on our society if not careful will have a deteriorating effect on our economic edge as a world leader.

His explanation of subprime meltdown and what caused is interesting. The era that claimed "riskless risk" now coming full circle and Washington as he explained need to be careful what diagnose it prescribes. Too much regulations in reaction to trillions of dollars loss is a temptation in a wrong direction.

I hope this interview should be seen by our current leaders and should read his book.

Post Script:

I wish Charlie's interviews are in Quicktime format so that I and other 10 millions iPhone owners can play it on their iPhone, it's a great convenience & its mobility make it easy to play it whenever one wants.

Moez Austin

sock puppet  10/25/2008 06:47 PM Report

Greenspan's doing his double-speak on national news. His ivy league ass is being exposed for the pandering no-regulation set-up of the common man these free-market laissez faire capitalists love to exploit. It took him ages and repeated quizzing for him to finally admit his 'ideology' (his favorite word) was flawed. He couldn't admit that housing prices wouldn't go up forever. As an economist did he cut the class on tulip speculation? But he didn't know. Well crap what were the big bucks WE paid him for all those years - and still with an obscene pension. Hell I didn't know either. Is my check in the mail?

Preston  10/25/2008 06:45 PM Report

I still don't understand. But I don't understand LESS. I like how Mr. Smick explains things. Best explanation I've heard so far; and to think, before watching this interview, I thought I wanted to make fun of his name (Why am I such an asshole?!)-------------- Anyway, I think while I'm riding the rail, I'll read this book, instead of Mice and Men.

Wilbert Bruegger  10/25/2008 12:41 PM Report

David deserves for his interview ten stars.He spoke with plain and rational language the undercurrent of our current financial mess.

Max Power  10/24/2008 10:18 PM Report

Mr Smick has done the best job of describing this mess I have ever heard. What a great interview. It looks like he could pass for Joe the plumber-honest and humble. Thank you Mr Smick. Mr. Krugman was great also.

Jon Brooks  10/24/2008 08:14 PM Report

The word "credible" comes to mind. Mr. Smick is credible when so many obfuscate, misdirect our attention and conceal their complicity. Thanks to Mr. Smick and Mr. Rose for putting the need for transparency and reasonable restraints on greed, hubris and ego mania at the forefront.

Meanwhile, the least fortunate among us (a growing demographic) will continue to suffer because so few with so much have chosen credibility over the excesses of self-interest.

Ken Fette  10/24/2008 06:22 PM Report

I liked his explanation because it truly explained the situation in language I can understand (Salad Bowl) His solution was also very viable... real penalties, for risking other peoples money. To those that are given much, much is expected... since those, money handlers, have shown that they can't be trusted, they now reap the consequences. Thanks for the interview of Mr. Smick.

TABS  10/24/2008 03:46 AM Report

DITTO..."SMICK IS BETTER"....At least this is real world stuff with some real world solutions. Meat and Potatoes.

Chris Baker  10/24/2008 12:45 AM Report

This was an outstanding interview about the problems with regulation and why banks won't step up lending.

RE Mant  10/24/2008 12:13 AM Report

Smick is better, but needs to to read Robbins too. Globalization has been with us for a long time. The best way to restore confidence is stop devaluing the currency through stupid schemes to restore confidence.