There's nothing to get, bro. The Bankers and mono-lines didn't want another big hit on CDS payouts/hedges so they pressured regulators to force the absorption of Merrill. That way, a credit event was avoided saving the already teetering banks from certain Chapter 11. The fear wasn't the oft-romanticized financial apocalypse scenario. It was the certain doom of a small network of Large Banks that had written the preponderance of CDS crap while holding the bulk of Federal Reserve Stock. If Merrill went down, the Big Guys would have to cough up more dough on hedges or payout, which they didn't have! So Bernacke (the Whore) coerced Lewis to throw BoA shareholders under the bus (the public) to save Wallstreet. Where have we heard that story before??
Isn't that the same as financial apocalypse though? If the banks deregulated themselves enough to form a functional oligopoly, then linked arms with huge counter-party risk, doesn't that effectively make they the system, not a part of the system? At that point, you can do anything you want.
Let me first thank you for responding in a reasonable fashion. I am happy with a sensible argument. Let me try to respond to your points one step at a time. Letting Mer go wouldn't have been any different than Leh and that's precisely the point. Given the consequences of Leh (and they were immense; I can give you examples), I strongly believe that the mkt wouldn't have been able to survive another such calamity. The idea was simple. Negative shocks of a certain magnitude can be absorbed by the system, but if the shock is too great it creates non-linear effects, which can amplify, resonate and bring the whole system down (there's all sorts of analogies in physics and there's lots of research going on at the moment looking at finance as a complex distributed system). Letting Mer go down would have been too large of a shock to a system that's already greatly weakened by Leh. Letting BoA absorb the Mer losses (while backstopping BoA) is a shock that can be dealt with. As to scenarios, I have a whole load of them and some of them looked mighty plausible last fall. If you want some examples I could give you a few involving the CP mkt and the money funds. As to who knows best, fine, I agree with you, the Fed and Wall St are to blame for getting us into the mess in the first place, but arguably who do you think is better qualified to make a decision like that during the time of crisis? You? Me? Maxine Waters? Joe the Plumber? As to the possible alternatives, there were three: a) let them fall; b) marry them to willing BoA; c) bail them out, a la AIG. As mentioned before, a) was not viable alternative. As to b) vs c), I fail to see a large difference. Either the BoA shareholders take a loss or the US taxpayer. Take your pick... I disagree with you on your other points. You're opposing the Fed's action on ideological grounds. The Fed was being realistic and couldn't give a rat's ass about ideals and moral hazard and the like. I much prefer a realistic solution, rather than a stand on principles. Idealism and dogma is the scariest thing in government, as far as I am concerned. Just look at Dubya... And completely disagree with your last point. Of course, they would rescue BoA if it was on the brink. One way or another, no bank can be allowed to go down, given the structure of the modern financial system. Letting Leh go was a mistake and everyone has admitted it, so how is that different? In fact, I think the Fed was relatively gentle with BoA. They didn't force Ken to open his big mouth in the first place, they just prevented him from reneging on the trade and that was fair, don't you think? If you do a trade and it goes against you, do you expect to be able to go to the broker and say 'I don't wanna do it; cancel the ticket'? I don't think so...
Firstly, achilles, if you don't start talking like a sensible person, as opposed to a 5yr old, this will be my last post in response to your comments. So, pls, rein in your imagination and let's have no more 'chicken-necked women' or whatever... First and foremost, as someone who has all these grand views on the systemic issues CDS contracts have single-handedly caused, have you actually ever traded CDS? Or cash bonds, for that matter? Normally, the people who complain the loudest about the dangers of CDS are outsiders, who know very little about how the credit mkts function. Just for your guide, I have, although I don't claim to be any sort of expert (sovereign CDS is a somewhat different mkt). At any rate, I agree with your argument that excessive leverage is bad. What does that have to do with the viability of CDS as a financial instrument? Yes, the system, in its current format, has become unstable, but I don't see what's so dangerous about CDS, provided, for instance, they're exchange-traded and stringently margined. As to all this 'fractional lending' commentary, pls do grow up. Leverage in its various forms (incl fractional reserve lending) is part of modern society. Trying to ban all leverage, because it's dangerous and destabilizing when taken to extremes, is akin to banning bathtubs, 'cause they can cause drowning accidents. Secondly, yes, we all agree that AIG irresponsibly and recklessly sold too much protection at wrong prices. I agree that's stupid. So what's your point? Thirdly, yes the government does have the authority to ban any further trading of CDS. There's no need for it (which is why nobody sane is suggesting it; Taleb doesn't fall in the above category), as I pointed out above. What I was referring to as 'idiotic' is your suggestion that the govt nullify all existing contracts. Do you have even the slightest clue of what sort of havoc this would cause? As someone who had to deal with residual and wrong-way risk in the aftermath of Leh, I can assure you that it's not something you can even begin to imagine. Fourthly, yes, excessive leverage, and the fragility of the financial system that results, is a bad thing. Where did I say otherwise that you have to keep belaboring the obvious time and time again? In general, all this 'house of cards', 'cascading failure' malarkey sounds awfully cliche and, frankly, regurgitated to me. Let me give you a hint, it's not about structured credit, CDOs, CBOs and what have you; it's all about repo and the money mkts. It all started with BNP and Coventree; I was there, so pls don't give me the fluff you've read somewhere. As to your last point, you seem awfully confused and jumble everything together (and you rant a lot, which doesn't help). So let me try to unscramble for you. I already spoke about CDS trading on an exchange and being strictly margined. That should ensure that leverage is kept under control. As to your absurd point that CDS should be traded 1-to-1 vs the underlying, you need to realize that CDS is NOT insurance. It's a mkt instrument designed for price discovery and hedging, like futures. Or do you, in your infinite wisdom, suggest that I can't trade a crude contract, unless I have 1000 barrels of oil in my backyard? I hope this clarifies things for you. Pls let me know if you need me to expand on anything
I'm sure this is a really dumb question, but so much water has gone under the bridge that I can't recall the time sequence. Did B of A take TARP $ before or after the M&L "forced" merger? I can't stand Ken Lewis. I feel like Delilah. Someone bring me his head on a gold plate.
I am coming around to your thinking and feel foolish I did not consider Lewis could act like this. Honestly would not have crossed my mind to blackmail the Fed and Treasury. This article here also has a clip of testimony I didn't get a chance to see. 19 min market in the video. Damn... http://www.financialsense.com/fsu/editorials/kirby/2009/0612.html