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Crisis Economics In USSR: Roubini Keeps His Dead Cat In The Bag

Economics / Stock Markets 2010 May 13, 2010 - 04:29 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleI noticed two links to Professor Roubini today. The first one was from February  when he said  that the S&P 500 will drift sideways for most of 2010 which is a marked change from his opinion fourteen months ago when he was saying that the nascent rally in March 2009 was a dead-cat bounce sucker rally.

OK that was three months ago, he has no comment so far on the little hiccup, but I was pleased to see that’s he’s coming round to some (minority) opinions that were put about on or around  April Fools Day 2009.

I also saw the Nine Commandments contained in a chapter from his new book,  Telegraph from his new book Crisis Economics: A Crash Course in the Future of Finance:

The Nine Commandments:

Commandment ONE. Traders and bankers must be compensated in a way that brings their interests in alignment with those of shareholders.

Outside of the “command-and-control” element of that idea (which I object to), I also object to the idea that shareholders in a company should not have the exclusive power to decide compensation of their “employees” , which currently they don’t and that is not a good thing. What I think Roubini misses is the legal issue, which is the obligation of agents to act in the best interests of their employer.

But that is pretty impossible to achieve, and shareholders always have an option to vote with their feet. I have another suggestion, which is that “risk-takers” should be personally liable for the risks they take, either by making entities that specialise in “risk” (like gambling syndicates and insurance companies), partnerships with the partners having unlimited liability (like the model that Lloyds of London used to have, and still does to some extent). And ensuring that entities that are implicitly or explicitly guaranteed by the taxpayer, should be obliged to “re-insure” their risk, like for example primary insurance companies in Singapore are obliged to reinsure 90% (I think) of their risk.

Commandment TWO: Securitizations (bundles of loans) must be more heavily regulated, more transparent, and the securitization process more scrutinized…

Some people believe that securitisation should be abolished. That’s short-sighted: properly reformed, securitisation can be a valuable tool that reduces, rather than exacerbates, systemic risk. But in order for it to work, it must operate in a far more transparent and standardised fashion than it does now…

…Absent this shift, accurately pricing these securities, much less reviving the market for securitisation, is next to impossible. What we need are reforms that deliver the peace of mind that the Food and Drug Administration (FDA) did when it was created.

At the present time, we are stymied by a serious apples-and-oranges problem: the absence of standardisation makes comparing them with any accuracy impossible. Put differently, the current system gives us no way to quantify risk; there’s far too much uncertainty.

Standardisation, once achieved, would inevitably create more liquid and transparent markets for these securities.

I just love the “command and control” woolly thinking of committed Keynes Apostles. All of that is correct up to a point, and it is true that the reason no one wants to buy securitized debt at the moment is that no one knows how to price it because of lack of standardization and transparency.

But what useful “guidance” the terminally incompetent gang of regulators, Congress pork bellies, and economists who, if they did not create this mess, certainly allowed it to happen can provide to “re-start securitization” , is beyond me.

There are two issues here, first the valuation of securitized debt held by financial institutions implicitly and/or explicitly guaranteed by the taxpayer, and the “risk weighting” allowed by regulators to be applied by the exposed parties. Of course the regulators need to be sure that the minimum amount of money those assets can be sold for, is above a certain threshold; so that they don’t get woken up in the night and asked to take the long position of last resort (which is what the Fed did with those $1.25 trillion of toxic garbage they bought).

And how do you do that?

Well enough of all the explanations from the crowd of people who DON’T know how to value securitized debt. How about insisting that the valuations were done by people who DO know how to value securitized debt and come up with a reliable estimate for the minimum the morons that bought it will be able to sell it for, at an indeterminate time in the future.

And if everyone who carried PI insurance to do such valuations says “it’s impossible to do a valuation because the deal is too complex and there is not enough transparency”, then the regulators should adjust the allowable risk weighting accordingly.

And by the way, in my opinion (as someone who does/did a lot of valuations, it’s more or less impossible to value that toxic garbage because there is not enough information).

But the good Professor seems to have some idea that some angel in the sky will swoop down and magically value the stuff; that was the same idea that Hank Paulson had when he created TARP, then Timothy Geithner had the same idea on PPIP which anyone who knew anything about toxic garbage knew was an RIP cat in May 2009, although it took the genius tax-evader another nine months to figure that out.

PLEASE Professor Roubini…please PLEASE!!!

 Just stick with your economic theories and your dead cats. PLEASE don’t try and over-extend yourself by trying to say something sensible about valuation. Trust me; you know less about valuation than you know about dead cats.

This is the point, there are two:

(1) What risk weighting the regulator allows for whatever valuation standards are adopted (personally I recommend that the Monty Python Valuation Standards so popular before the crash and so much loved by Moody’s, FASB, BIS and IFRS, are replaced by International Valuation standards). the job of the regulator.

They famously didn't manage to figure that out properly, lets not complicate their pretty little heads by asking them to do anything more that say "If the valuation is correct - this is what the risk weighting should be".

(2): The other point, dear professor, is that the “command and control” idea won’t work. It didn’t work in USSR, and it won’t work to re-start the securitization business. That business is about free-markets and free enterprise, and in case you forgot, this is how that works.

1: Party (A) comes up with a “product” (say a RMBS Rev[B]).

2: Party (B) has a look – he says “I don’t want to buy that at the price you are asking”

3: Party (A) goes back to the drawing board, and revises and re-submits, until he comes up with something that Party (B) wants to buy.

Government, regulators, and economists; regardless of how smart they are, need to keep out of that process.

Commandment THREE.  Collateralized Debt Obligations (CDO) are evil and should be banned.


A CDO is just a bet between two “sophisticated” adults; they have bets like that in Las Vegas, and on sports events in America all the time. All you got to do is refer back to comments on Commandment ONE and TWO.

Commandment FOUR: The over-the-counter derivatives market needs to be comprehensively reformed and forced onto central clearing houses and exchanges and registered in databases, with usage of OTC derivatives appropriately restricted. The regulation of derivatives should be consolidated under a single regulator.

OK no sweat, we all saw The Warning (great movie), and Broooksley Born has certainly been vindicated. So why not?

But please remember dear Professor, it was not derivatives that caused the fundamental problem, although for sure they frightened the living daylights out of Hank Paulson (not a bad thing).

Commandment FIVE:  Credit rating agencies must be “collared” and forced to mend their ways, with greater competition also introduced to the sector.

Sorry not quite, credit agencies should be made to carry Professional Indemnity Insurance, and be liable for their mistakes, but sure, open up the market for anyone who can buy PI insurance.

Commandment SIX: Institutions deemed “too big to fail” including Goldman Sachs and Citigroup should be broken up and the Glass-Steagall Act re-enacted and updated to reflect the challenges posed by the shadow banking system.

Grow up; Volcker has better ideas, although they are not perfect, see comments on Commandment ONE.

Commandment SEVEN: New regulations should not be limited to a select class of firms but imposed across the board, to prevent financial intermediation from moving to smaller, less-regulated firms.


Commandment EIGHT: Regulation should be consolidated into fewer, more powerful regulators and regulators should be compensated in a manner befitting their role in safeguarding financial security.

Great idea, and how about mandating the end to pork and proportional representation, plus here is an idea, how about having a box on the ballot that said “None of The Above”, and if the “None’s” won then (a) there would be a new election and (b) anyone who got a “None of the Above” vote would not be allowed to stand for an elected position ever again (now that would be democracy).

Commandment NINE: Central banks should proactively use monetary policy and credit policy to prevent the inflation of asset price bubbles

Fantastic idea; why did I never think of that? Small problem, there was now explanation about how they recognise a bubble.

Here’s a few tips:

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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