Mmmm all those Profs. and only one real (not just intellectual) crook among them.

“…People in developed countries have had a few decades to try out and reject excess. It isn’t just an awareness of environmental degradation that pushes us to go green; it’s a knowledge, gleaned from firsthand experience, that conventional living generates a level of waste that makes us uncomfortable. In urban China, however, bigger is still better. Most middle-class Chinese are still preoccupied with finding ways to display their wealth, not minimize its impact on the world…” http://www.worldchanging.com/archives/007153.html

There is a danger in bigness, but there is also a danger in smallness. The danger in smallness is that there is a danger of a herd mentality taking over, whereas with the big banks. The Fed can get the CEO’s of all of the major banks in a room to solve a problem (which is what happened with LTCM).

Also, I seriously doubt that other big banks were quietly granted exemptions by the Fed. Again there is the assumption that if you can’t see the news, it must be bad, whereas my sense is that what isn’t being seen are lots of people making lots of money.

Most of the transactions involved in derivatives are zero-sum, which means if someone makes money, someone else must lose money. Two very important types of derivatives are credit default swaps and synthetic CDO’s, Credit default swaps are basically life insurance for companies. You pay a premium for a policy that pays if a company goes under. Synthetic CDO’s are made up of CDS’s and are sort of the reverse of cash CDO’s. Cash CDO’s stop paying when companies default, whereas synthetic CDO’s are “mirror image” that pay money when companies default and don’t pay if they don’t.

People holding synthetic CDO’s and CDS’s are now making huge amounts of money right now.

Also if you are a competent investment bank, then what you do is to split things up so that you buy and sell cash CDO’s and synthetic CDO’s so that they cancel. Lose money on one, make money on the other. You then charge the customer a small fee for issuing the securities, and that is your profit.

Banks aren’t run by gamblers and a gambling mentality is horrible for an investment banker. Wall Street *traders* have a lot of risk tolerance, but they are kept on short leashes by the risk managers who in turn are monitored by the Federal Reserve. An investment banker is more akin to a casino owner than a gambler.

foreign investors — of the institutional kind — don’t have a lot of exposure to China (no doubt to their chagrin) b/c of China’s controls. So its domestic market has moved to its own dynamic amid global turmoil. china’s central bank is still talking about the challenges of managing inflows, including inflows from the ethnic Chinese community outside China.

agree with the point about the GIIP for the US. Russia also effectively expanded its GIIP over hte past year — as the ongoing buildup of foreign claims on russia was offset by the buildup of Russian reserves. and since f. claims on Russia’s stock market increased in value dramatically over time, Russia’s NIIP isn’t as positive as you might think, given its $100b current account surplus in 06 …

basically, Russia’s government ended up with a big net foreign asset position, but its private sector has a net liability position.

the USG by contrast has a very large net liability position — very few assets and a ton of liablities.

Another point was made a few weeks ago that perhaps US money managers had contributed marginally to dollar weakness by reducing home bias and increasing purchases of foreign financial assets. Given the US current account deficit and resulting NIIP net liability position, this has the effect of expanding the gross size of the US IIP (GIIP). The US GIIP, because of the bias in currency composition of assets and liabilities, is basically short the dollar, long foreign currencies.

The GIIP is an investment position from the US perspective, but it can also be used as a source of liquidity for a variety of reasons - including as an emergency reaction to a domestic credit crisis. In this case, if the US draws down its GIIP for liquidity purposes, it reverses the dollar effect - i.e. resulting in dollar strength. This includes central banks not only selling treasuries into interest rate strength (i.e. lower rates) but perhaps also selling the underlying dollars into dollar strength (buying back their domestic sterilization debt if needed). (Didn’t I see somewhere that the RMB was noticeably marginally weaker around its dollar ‘peg’ at some stage in the past week or so?)

“…When an investor controls a stake in a company via derivatives, they should conform to whatever rules… that would apply if they owned the underlying shares.” http://www.ft.com/cms/s/0/7cb477d4-51da-11dc-8779-0000779fd2ac.html

“HBOS’s annual report for 2006 covers almost 200 pages. But the document does not carry a single reference to Grampian Funding, the vehicle the bank uses to help lower its financing costs. So investors could be forgiven for expressing some surprise on Tuesday when HBOS announced that it would take direct responsibility for financing Grampian. Grampian, which has assets of about $37bn, is one of Europe’s largest bank conduits. These are funding vehicles usually kept off a bank’s balance sheets that have emerged as pivotal players in the current market turmoil. HBOS, the UK’s fourth-largest bank, is the largest financial institution so far to publicly admit the effects of the drought in the market for asset-backed commercial paper, which conduits such as Grampian rely on for funding. But other banks are suffering as well… The worry is that unwinding conduits, many of which were structured so banks could make more efficient use of their regulatory capital, will prompt a wider credit crunch that could feed through into the economy. However, such fears seem excessive…. the impact on capital will change at the beginning of next year, when European banks are due to adopt the Basel II framework, which does not distinguish between off- and on-balance sheet vehicles. Another concern raised during the recent turmoil has been the impact on structured investment vehicles, which are similar to conduits but are generally not as closely aligned with banks. The fear is that SIVs that cannot call on banks for funding will have toliquidate, potentially triggering a further sell-off. However, industry observers point out that many large SIVs are extremely conservative, allowing them to unwind positions in an orderly way if funding becomes difficult… Observers point out that some of the longer-running SIVs have survived market panics such as the Russian government default, the collapse of Long Term Capital Management, and the terrorist attacks of September 11…” http://www.ft.com/cms/s/0/cd798976-51d9-11dc-8779-0000779fd2ac.html