reply to post by ziggy1706
Derivatives aren't the problem. The securitization market is a marvel of modern capitalism. It aids in the creation of business ventures that might
not have otherwise been recognized in the past. Nikola Tesla's alternating current system for electricity generation and distribution was only caught
by the keen eye of JP Morgan, probably the greatest of the 19th century's most prominent businessmen. Just imagine if there wasn't a man with as
much capital as he at that very time the brilliant Dr. Tesla was alive and kicking. It must have been luck.
The problem began with the passage of the Commodities Futures Modernization Act under President Clinton, which relinquished the oversight capabilities
of federal regulators over the exchange of securities. Under this regime, a whole host of inappropriate new securities were invented to extend credit
in such a way as to increase profit for interested investors.
The problem began when large corporations, such as AIG, took this to their advantage. They insured lending from hedge fund managers to subprime
borrowers, such as low credit rated businesses and individuals so that they could collect interest and make more money. By insuring subprime
borrowers, this essentially raised the credit rating of these borrowers so that mutual funds could legally lend to them.
It's a simple money making procedure: a) raise the credit rating of previously low credit rated borrowers by insuring them, b) extend credit to low
credit rated borrowers, c) collect interest where it was previously illegal to do so and d) because more interest, and therefore more income, is
collected from more borrowers, the hedge fund managers and their insurers (e.g. AIG) make more money.
And to compound the whole problem, because of the nature of derivatives, which are simply a method to securitize risk by distributing it through a
large number of financial instruments (futures, options, swaps, convertibles, warrants, etc.) these hedge fund managers could leverage at totally
inappropriate levels, claiming that their risk was all accounted for and under control.
When the market figured the insurers were doing something fishy, the subprime borrowers were exposed, and investors pulled out from all these hedge
funds, which were backed up by the wealth of millions of regular Americans. The end result was none of these people saw a single dividend for all the
money they ever invested in these funds. Billions of dollars were evaporated and that prompted regular savings banks to freeze up credit, thereby
slowing business and bringing international trade to a seeming halt.
In unveiling the governments’ new plan, Geithner was shortest on detail about proposed solutions to most fundamental cause of the financial
meltdown — the relentless rise in foreclosures and fall in home prices. Following up on a proposal introduced in the House last month, Geithner said
the new plan will include $50 billion to stop foreclosures. The details of how it will be spent, he said, would be announced “in the next few
From another article, but this relevant:
Foreclosures were never the cause of the financial meltdown. They were the symptom of a crumbling economy, the result of victimization on behalf of
greedy, irresponsible hedge fund managers and insurance corporations. Why are these foreclosures happening in the first place?
I have yet to hear a single suggestion from Capital Hill in regard to regulating Wall Street. All their plans have to do with is capital injection.
The simple answer is to reinstate the Glass-Steagal Act and create a permanent federal oversight committee for the creation of derivatives. The
industry needs laws to keep these things in check. Investment banks shouldn't be allowed to leverage so much. There are legal restrictions on the
operation of regular savings banks, but why not on AIG, Bear Stearns and Lehmans? Is the government in on this?
What are more bailouts going to accomplish but funnel money to corporate bonuses, galas and travel funds? Why would I give money to failed banks just
so they can lend it out my neighbors? Does that even make sense? I'd rather have a Japanese bank taking care of my money. The economy should never
fall prey to nationalization or national incentives. Why hasn't that option ever been brought up yet? Forget nationalization, BANKRUPT THE BANKS.
Send us some responsible foreign corporations to get the job done. Same goes for the auto industry. The economy is supranational. Global capitalism is
on the rise.
Why exactly are banks short of capital to lend? America is going downhill. If Congress doesn't regain power over the printing of money then this will
never be fixed. The Federal Reserve can not be trusted if it refuses to be audited. Money printing should lie in the hands of the people, in the
Republic, in the hands of elected representatives. Otherwise, there is no reason for anyone to be transparent whatsoever.
[edit on 31-3-2009 by cognoscente]