Why We Need Derivatives Regulation

[one...two...tree 2,762]

A bank can do whatever they want with their investors money but they should not be able to gamble on or risk any cash that is deposited with them. Why should the FDIC and account holders bear the burden when some dichkead gambles our money, walks away with a hefty bonus, while I lose any money over x amount not covered by the FDIC?

That is what needs to be protected. Not to mention, no single player should ever be big enough to able to take down an entire economy. US financial markets are like the wild wild west. Hence why to this day, not one single dollar of mine is invested in them.

That's just it. They were gambling with their depositor's money, which was backed by the FDIC. A real recipe for disaster and the reason why we were in the mess in the first place.

Why not just eliminate the moral hazard, then? Bailouts, the FDIC, the "lender of last resort" Fed, and other schemes meant to socialize losses among the American people enable such risk and wildcat behavior, for they disable the function of "loss" in the profit/loss system.

Because people want a safe and reliable place to put their money away instead of stuffing it in their mattress or burying it in their backyard. The FDIC was as much a benefit to banks as it has been to depositors.

Then you must accept the excessive risk, socialized losses, and financial disasters inherent in a market that fosters moral hazard.

The FDIC has worked very well for both banks and depositors now for a long time, provided there are enough regulations on what kinds of risks banks can use depositors' money for. The FDIC is funded by the banks themselves, which is more or less passed on the depositors. A worthy protection for peace of mind.

[mawilson 2,133]

The FDIC has worked very well for both banks and depositors now for a long time, provided there are enough regulations on what kinds of risks banks can use depositors' money for. The FDIC is funded by the banks themselves, which is more or less passed on the depositors. A worthy protection for peace of mind.

I have no beef with FDIC or offering some protection to the depositors.

It's redistributing our wealth to the shareholders and bondholders of the failed banks

that I have a problem with.

[scandal 951]

Paulson insuring the risk of favored banks by hedging it to the backs of the American populace hardly makes him a savior of America--it makes him scum.

Indeed.

Not to mention that any business that can't "make payroll next month" without having to

borrow money from short-term credit markets is NOT a responsible business.

I have a small business. I don't need "commercial paper" to make payroll.

Do you realize how ridiculous that sounds?

Ridiculous to you.

Not ridiculous to Mark Peterson, or to the treasurers and CFOs of countless of large and small companies across the country that use the commercial paper market every single day to manage the cashflows of their businesses. Accounts receivable and payable can be lumpy - sometimes you get a whole bunch of receipts at one time, sometimes you have a whole bunch of bills outstanding with a big payment coming in at the end of the week or the month to cover them. The CP market smooths out those bumps in an operating company's business. If you don't understand that, and think it's "ridiculous", I sure as heck wouldn't trust you to be the CFO of my firm.

Here's a good case-study of how the CP market is used, and how scary it got last year.;

I've only quoted the case-story of Mark Peterson, end user of the CP market. I highly recommend the rest of this piece, as well as the rest of the TAL (This American Life) series on the meltdown last year. It's a good layman's guide to all the moving parts of the crisis we went through.

http://www.npr.org/templates/story/story.p...toryId=95099470

The nightmare scenario rattled Mark Peterson, far from the halls of finance, in Memphis, Tenn. "For those of you who've experienced an earthquake, some say it's a soul-wrenching experience, and it's massively moving everything," Peterson says. "And that's last week. There was a monster unleashed. The commercial paper market, which is the most liquid market, probably in the world, basically froze up."

Peterson is treasurer of Servicemaster, which owns, among other things, a lawn care company, Merry Maids and Terminix, which will get rid of your termites. By "commercial paper," he means a specialized kind of short-term loan. It's one of those obscure financial tools that help make the world go around.

"Let's just say you have Terminix come out and treat your house, you write a check," he explains. "Our billing department marks your account as having been paid. What's our cash position? Do you have money or do you need money? Today, our company, we have money.' "

Peterson's company might or might not have cash money the next night. It's no big deal — maybe it needs to buy a lot of termite poison or upgrade its fleet of termite-fighting vans. All companies move between having cash on hand and not having it every day. Some days they have extra money. Some days they need to borrow.

If you're an ordinary consumer, you might use a credit card to bridge the gap. If you're a gigantic company, you use the commercial paper market, a way of borrowing a lot of money.

What Peterson witnessed that frightened him so badly was the sudden seizure of that market. After the failure of the investment bank Lehman Brothers and the near-collapse of insurer AIG, commercial paper suddenly became very difficult to get. On Sept. 17 and 18, the market came dangerously close to freezing entirely — an event that could have paralyzed the financial system.

[scandal 951]

Cash is king. Credit is a trap. I would rather pocket the 1-1/2% each month than pay it to a creditor. Plus, I can get a 2% discount for paying within ten days of invoice date.

Just try to manage a just-in-time supply chain with that kind of attitude. Tying up the sums of cash you'd need to pay suppliers in response to sudden upswings in demand is simply not an efficient use of capital. You want to keep a reasonable cash reserve, but you also need access to short term credit for those cases where you want to ramp up production suddenly. Otherwise you're either keeping excess inventory, or excess unproductive cash balances.

[mawilson 2,133]

If you don't understand that, and think it's "ridiculous", I sure as heck wouldn't trust you to be the CFO of my firm.

I understand that and I still think it's ridiculous.

I wouldn't want to be the CFO of a firm that would go tits up after even a minor hiccup in the credit markets.

Not having a cash buffer large enough to make payroll is simply irresponsible.

[w¡n9Nµ7 §£@¥€r 123]

haha, you said tits.

[scandal 951]

If you don't understand that, and think it's "ridiculous", I sure as heck wouldn't trust you to be the CFO of my firm.

I understand that and I still think it's ridiculous.

I wouldn't want to be the CFO of a firm that would go tits up after even a minor hiccup in the credit markets.

Not having a cash buffer large enough to make payroll is simply irresponsible.

'Minor hiccup' in the credit markets.

'Nuff said.

[mRx 16]

My market basket consists of cigarettes, beer, and 7-11 munchies. Base year 2006.

sounds like dinner that mom used to make.

Just imagine, they pay those economics PHD fedcoats at the BLS six figures (your tax dollars) to calculate the inflation rate, but a degenerate drunk like myself can do it, and I've only got a GED!

[mRx 16]

A bank can do whatever they want with their investors money but they should not be able to gamble on or risk any cash that is deposited with them. Why should the FDIC and account holders bear the burden when some dichkead gambles our money, walks away with a hefty bonus, while I lose any money over x amount not covered by the FDIC?

That is what needs to be protected. Not to mention, no single player should ever be big enough to able to take down an entire economy. US financial markets are like the wild wild west. Hence why to this day, not one single dollar of mine is invested in them.

That's just it. They were gambling with their depositor's money, which was backed by the FDIC. A real recipe for disaster and the reason why we were in the mess in the first place.

Why not just eliminate the moral hazard, then? Bailouts, the FDIC, the "lender of last resort" Fed, and other schemes meant to socialize losses among the American people enable such risk and wildcat behavior, for they disable the function of "loss" in the profit/loss system.

Because people want a safe and reliable place to put their money away instead of stuffing it in their mattress or burying it in their backyard. The FDIC was as much a benefit to banks as it has been to depositors.

Then you must accept the excessive risk, socialized losses, and financial disasters inherent in a market that fosters moral hazard.

The FDIC has worked very well for both banks and depositors now for a long time, provided there are enough regulations on what kinds of risks banks can use depositors' money for. The FDIC is funded by the banks themselves, which is more or less passed on the depositors. A worthy protection for peace of mind.

You need to realize, Steven, that every bank in the US is technically insolvent--they do not have sufficient reserves to cover all deposits.

This is a fundamental problem with our credit markets. Banks are lent long and borrowed short, but there are no fears! Why? Because the FDIC has the full backing of the Treasury and therefore the Federal Reserve.

This is not "peace of mind".

Banks should operate no differently than any other institution--if they can't meet their obligations, then they need to fail, and their assets auctioned to settle with depositors.

I urge you to read this article, Steven.

[w¡n9Nµ7 §£@¥€r 123]

Oy vey, more lew rockwell?

[mRx 16]

Oy vey, more lew rockwell?

Just click the link, AJ. Rockwell hosts the site, the article was written by Rothbard.

[I AM NOT THAT GUY 5,715]

Cash is king. Credit is a trap. I would rather pocket the 1-1/2% each month than pay it to a creditor. Plus, I can get a 2% discount for paying within ten days of invoice date.

Just try to manage a just-in-time supply chain with that kind of attitude. Tying up the sums of cash you'd need to pay suppliers in response to sudden upswings in demand is simply not an efficient use of capital. You want to keep a reasonable cash reserve, but you also need access to short term credit for those cases where you want to ramp up production suddenly. Otherwise you're either keeping excess inventory, or excess unproductive cash balances.

You have never run a bussiness IRL, have you? I have about 30 years experience in this industry, 17 on my own.

"Just in time" inventory is easy. A simple spreadsheet program is all I need to track inventory. (In the old days, we did it on index card files.) I don't keep anything I can't turn around in 180 days and I keep a 30 day supply. The rest I can get in a day or two. Let the distributor worry about keeping excess inventory. I have about a 90% immediate fill and 10% special order.

Having an inventory that is paid for is no liability, and gives you a comfort zone when things slow down a little. Credit can be a byotch, when you are trying to float a purchase, and you get a hiccup, that cascades all the way down the line.

Seen that happen a few times with Hamilton and Taft, when an acquaintance of mine was CIO a couple decades ago. I remember at the time, he was happy to only have to pay Crocker Bank at a 28% overnight rate. Good thing they didn't hire me, because I never crunched COBOL before, and his programmers didn't want to work for someone who "only" knew boutique languages like C. Putzes!

Edited October 16, 2009 by Lone Ranger

[scandal 951]

Bill, I have no real quarrel with you.

Many companies, large and small, maintain substantial positive cashflows on their balance sheets and have no need to turn to the credit markets. If you run a company that operates in this manner, kudos to you. Some well known large companies that maintain this enviable position include the likes of Microsoft, Berkshire Hathaway and Bloomberg. When they see an acquisition target they like, they are in a position to pay cash. They are generally able to run their operating businesses on a cash basis. Nonetheless even these firms find themselves taking advantage of bank lines of credits, floating bonds in the bond market, and utilizing the commercial paper market. They do this for reasons of lumpy receivables, and for reasons of adroitly managing their cash balances and having treasurers who try to maximize ROI out of them. There's no "sin" in doing so. On the contrary- if you are a shareholder of Microsoft or Berkshire (Bloomberg of course is private), you WANT them to do this, since it increases their bottom line profitability and therefore your return as an equity investor.

More to the point, regardless of the fact that there exist businesses which always maintain positive cash balances, surely you recognize that there are many who do not. Again, this includes mom&pop businesses as well as much of the Fortune 500. Does this make them "bad" or irresponsible companies? I argue it does not. Provided that an on a reasonable averaging period (a quarter, say) they are able to consistently show net receivables as greater than net expenditures, what is the harm if they run a net cash deficit for a day or a week or even a month? If their bank is prepared to front them the money (in the form of a line of credit), or the markets are willing to buy their bonds or CP, that means that an underwriter (or investor) has analyzed their repayment capability, graded the risk, and determined it to be worthwhile. Should be case closed, right?

It's really at the very heart of entrepreneurial capitalism. A company has assets A on hand. It receives a contract to deliver goods or services in 60 days for an amount B, payable on delivery. It will cost C dollars to ramp up production, pay the overtime shifts, buy the additional inventory of goods needed to deliver on the contract. Assuming that B > C (that's their profit margin, roughly), but also that C > A (they don't have money on hand to complete the contract) - they have only two choices: either they decline the contract, because they can't afford to deliver it without borrowing OR they borrow the difference C-A (a bank loan, a line of credit, or commercial paper) and get the contract done. Is there a risk here? Of course. The risk is inability to deliver. You're stuck with a loan, but don't get the proceeds of sale. But the reward is making good on this contract, and more importantly having a growing successful business that earns a reputation for consistently delivering to its customers and making a profit. This type of decision happens in American busineses a thousand times over every single day. It is the very lifeblood of our entrepreneurial culture. I'm amazed that the laissez faire free market guys amongst us don't cede this point trivially - what's to contest, after all? To deny that this happens or that it is a vital and a good thing, or to claim it's irresponsible, is to show ignorance of Business 101.

Using Microsoft as an example:

Here's their 8-K filing to issue up to $2 Billion in commercial paper http://biz.yahoo.com/e/080922/msft8-k.html

Here's an assessment of their decision to float a bond issue for $3.8 billion http://www.smartmoney.com/Investing/Bonds/...-Bond-Offering/

All this from a company with $29.9 billion in cash on hand in most recent quarter. http://finance.yahoo.com/q/ks?s=MSFT

[w¡n9Nµ7 §£@¥€r 123]

Oy vey, more lew rockwell?

Just click the link, AJ. Rockwell hosts the site, the article was written by Rothbard.

Websense doesn't like Rockwell.

[mRx 16]

Oy vey, more lew rockwell?

Just click the link, AJ. Rockwell hosts the site, the article was written by Rothbard.

Websense doesn't like Rockwell.

Ah...

Have you tried plugging the URL into google and using the cache mode?

I'm unfamiliar with Websense, but that's how I got around alot of the filters in my previous employment.