Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Liquid Toxic Assets as Government Finances and Guarantees Purchasers

Politics / Credit Crisis Bailouts Mar 31, 2009 - 03:03 PM GMT

By: Paul_L_Kasriel

Politics Best Financial Markets Analysis ArticleDoes Kramer Finally Get to Be a Banker and Does There Have to Be Skin in the Game for CDS? - Cosmo Kramer of Seinfeld fame always wanted to be a banker. Will Treasury Secretary Geithner's Public-Private Investment Program (PPIP) finally allow him to fulfill his dream? PPIP should have no shortage of private investors signing up to buy financial institutions' toxic assets - sorry, "legacy" assets. After all, the purchasers will obtain government-guaranteed financing, government-guaranteed default-risk protection and plenty of leverage to boost returns. The question is how eager will financial institutions be to sell their legacy assets.


Given all the incentives for private buyers to participate, it is likely that bid prices for legacy assets will be above current market prices. So, those institutions that already have marked their legacy assets to current market prices might be willing sellers as they might now be able to book some profits. However, those institutions that are still carrying some of these impaired assets at historical cost will be less willing to sell because they would have to book losses.

We suspect that the regulators will "encourage" this latter group of institutions to sell their impaired assets. After all, one of the arguments for not marking down the value of legacy assets to market was that there was no market. In the not-too-distant future there will be a market. But what if selling legacy assets into the PPIP results in a selling institution becoming under capitalized? The regulators will tell said institution to raise additional capital in the private market. But what if the cost of this new capital is prohibitive? This is where Cosmo Kramer comes in.

The regulators/Treasury will tell this institution that it has a new partner - the taxpayers of America. That is, the federal government is likely to inject common equity capital into institutions that are unable to raise capital in the private market. Existing stockholders will see their equity diluted. In some cases, all they may have left is, in effect, a call option on the future profitability of the institution. Call this "nationalization lite." So, Cosmo Kramer will finally achieve his life's dream - he will be a banker. Or will he? You have to be a taxpayer to be a part owner of banks in this scenario. And since there is no known source of Kramer's income, it is doubtful that he is a taxpayer.

As the narrator on the Monty Python show would say, and now for something completely different. Some are arguing that participants' in the market for credit default swaps (CDS) should have a vested interest in the bet or "skin in the game." That is, unless one owns the liability of a company, one should not be allowed to purchase insurance against the liability's default. But wait a minute. Does the Chicago Board of Trade (CBOT) forbid the dentist in Scarsdale who has no idea of what the denting of corn is from going long or short corn futures?

Of course not. The more participants in the corn futures market, the more the merrier in the eyes of the CBOT. The Scarsdale dentists enhance the liquidity of corn futures. But might not a bunch of punters in corn futures increase the likelihood of a counter-party failure? Well, it has not. In the history of the CBOT, there has never been a default by the clearinghouse . You see, buyers and sellers of corn futures do not buy or sell from each other. Rather, every buyer of a corn futures contract purchases the contract from the exchange clearinghouse; every seller sells to the clearinghouse.

The clearinghouse can call on the capital of all its clearing members to make good on a trade. So the counterparty risk in corn futures is the collective capital of the clearing members, not the capital of the individual buyer or seller of corn futures. In addition, at the end of every trading session, losers must pay up to the clearinghouse the amount of their losses. In some circumstances, losers have to pay up during the trading session. If losers fail to pay up, their positions are liquidated by the clearinghouse, thus preventing the accumulation of losses that might lead to systemic risk.

With CDS being brought onto organized exchanges with clearinghouses, the risks of AIG-type defaults will be minimized. Therefore, there is no need to preclude punters with "no skin in the game" from participating in the CDS market. These punters will add to liquidity, not systemic risk.   

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

By Paul L. Kasriel & Asha Bangalore
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2009 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in