19 ms·

An Economy of Liars

78 points by watchandwait 16y ago

jamesbressi 16y ago
I know there has to be some great accountants, CFO's, finance people, etc on HN that can offer more detail about a Repo 105 and what the benefit is for an organization (maybe an individual?) to do this, not just in Lehman's case. WSJ explanation is straight forward, but I would like to hear a little more about this practice--hopefully I'm not the only one. From the article: "We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month."
- chasingsparks 16y ago
  Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.) IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.) The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up. For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882
  - mbateman 16y ago
    Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.
RyanMcGreal 16y ago
>Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. I happen to agree with this definition of the state's duties, but I have a more expansive notion of (3) than most libertarians. For example, universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them, but markets intrinsically cannot produce universal education or health care by themselves. As for the article, crony capitalism is precisely what happens when capitalists control the levers of government.
- randallsquared 16y ago
  universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them That's not clearly the case, at least for medicine: http://www.overcomingbias.com/2009/07/meds-to-cut.html http://www.overcomingbias.com/2009/07/meds-to-cut.html
  - Retric 16y ago
    That does not counter his argument. Demonstrating that highways are more expensive to build in some areas than others does not show that building highways is useless. Extreme Example: If the total cost of universal healthcare is less than the total benefit of universal vaccination then it can be a net gain even if every other dollar was wasted.
- ewanmcteagle 16y ago
  2 and (especially) your version of 3 are incompatible. Something has to give way. Some of us don't want to give way on 2.
  - RyanMcGreal 16y ago
    And some of us don't want to give way on 3. That means we need to learn to compromise. Ideology is neat and tidy; real life is not.
stretchwithme 16y ago
When something is regulated by the government, the nature of that regulation is subject to being influenced by the regulated. If the regulator itself had competition and participation in the regulatory scheme was voluntary, there would be real pressure to honestly regulate. The government could, instead of regulating companies itself, manage a system of competing regulatory regimes and let people decide which one they trust. There could be a "Good Housekeeping Seal of Approval" for accounting competing with FASB, companies could pick one and then publish to investors which one they adhere to. If investors find that they are consistently burned by companies governed by FASB, they would start to favor companies governed by the alternative. There would be real pressure to perform honestly over the longterm that a monopoly is not subjected to. In technology, we have all sorts of competing standards that live and die by how good the results are. Competition is a good thing and we need more of it, especially in government.
- eru 16y ago
  Yes. That's also a good argument for pushing for power from the federal to the state level. (And for having a federal system, or really small countries in the first place.)
  - stretchwithme 16y ago
    Amen. Actual, the competitive situation I described is already in place to a degree. Companies can go public in a different country, which many are doing since the oppressive sarbanes oxley regulations went into effect.
- dpatru 16y ago
  Government has been defined as a group of people that claim the exclusive right to initiate force against others in a particular area. Government and competition don't go together.
  - stretchwithme 16y ago
    Governments compete all the time. If you don't like the way California incorporation works, you can incorporate in Delaware. Even better is the way the Swiss do it. If you don't like the canton you're in, you and your neighbors can join a different one or start your own. It rarely happens, but the fact that it can keeps government responsive. Of course, decisions there are mostly done by referendum anyway, so its hard for government to get far from the people.
diego_moita 16y ago
Oscar Wilde said "a cynic is a man who knows the price of everything but the value of nothing". In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets". And libertarians think societies are just an individual multiplied by n, where n > 1; they ignore that people interact and depend on each other. Besides the list provided, I'd add 4) the state must protect the values of a society, also. Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it. Think of it as a "social infrastructure" akin to strengthening the social fabric or the human ties, of a society. It makes it more resilient to crisis.
- orangecat 16y ago
  In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets". Ridiculous strawman. If anything, it's the left that acts as though society is a simple system that can be effectively steered by central planning. And of course, selfless regulators will only steer in the right direction... I'd add 4) the state must protect the values of a society, also Which values? Christianity? Defending the sanctity of marriage? Preventing mixing of the races? Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it. Ah, the values that you personally like. And it's wrong to not ruin the lives of recreational pot smokers?
bluedanieru 16y ago
This article is schizophrenic trash. In one breath the author complains that the failure of the market is due to lax regulation and corrupt officials, while in the next he calls for further deregulation and less government oversight. He completely ignores the actual issue brought to light by the financial crisis which is exactly that this same spirit of "deregulation" has squeezed regulatory agencies like the SEC of funding and allowed them to be infiltrated by industry insiders, to all our detriment. The SEC ignored Madoff because they didn't want to rock the boat and even if they did, investigations cost money they don't have. The Wall Street Journal has been a real Newspaper of Liars since it was acquired by News Corp. Get this garbage off HN please.
- bluedanieru 16y ago
  Oh and speaking of crony capitalism: Mr. O'Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas. Perhaps Mr. O'Driscoll, a prime example of what he claims (to his credit) is wrong with the American economy, should take his own advice and quit the think tank.
  - hexis 16y ago
    I think his point was about bad incentives, not necessarily bad people. As Cato is neither a regulator, not a regulatee, I'm not sure why his employment there would make any difference.
    - bluedanieru 16y ago
      The influence government policy and are part of the revolving door system he claims is the problem.
      - dsplittgerber 16y ago
        This is just not true. The "revolving door"-system generally refers to the problem that private firms (the regulated) employ people who formerly worked for the regulator, thereby incentivizing regulators to regulate in favor of private firms so as to maximize their job prospects after their government term has ended. While it is true that candidates for governmental positons get temp positions at think tanks, think tanks themselves are neither regulated nor get paid by regulated firms to lobby the regulators to propose beneficial (to the regulated) regulations. So neither Cato nor AEI nor Brookings are part of the revolving door system.
tlholaday 16y ago
Anyone who cites the U.S. constitution and limited government, who does not in the same paragraph acknowledge that the reason government was limited was to protect the power of slaveholders, perpetuates the crime.
- astine 16y ago
  If you're going to make a claim like that, you ought to cite your sources.
  - tlholaday 16y ago
    The 3/5ths clause? The two-senators-each rule to assure that the slaveholding states would have disproportionate power, and the subsequent battles to prevent new slave-prohibitionist states upsetting the balance? Article 1, section 9 (The migration or importation of such persons as any of the states now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person)? The necessity of the 13th Amendment? Sanford vs Scott (4. A free negro of the African race, whose ancestors were brought to this country and sold as slaves, is not a "citizen" within the meaning of the Constitution of the United States. 5. When the Constitution was adopted, they were not regarded in any of the States as members of the community which constituted the State, and were not numbered among its "people or citizens." Consequently, the special rights and immunities guarantied to citizens do not apply to them. And not being "citizens" within the meaning of the Constitution, they are not entitled to sue in that character in a court of the United States, and the Circuit Court has not jurisdiction in such a suit. 6. The only two clauses in the Constitution which point to this race treat them as persons whom it was morally lawfully to deal in as articles of property and to hold as slaves.) ?
    - astine 16y ago
      How does any of this suggest that the purpose of limited government was to protect slaveholders? No one is going to say that allowances weren't made to protect them but the 3/5ths clause has nothing to do with the enumeration of powers or the scope of government. Limited government and slaverights are orthogonal issues and should be treated as such.
Maascamp 16y ago
This article attacks the current attempt to create new regulations without actually providing any alternatives to fixing the problems in the financial system. The author states: "If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets." Yet the author provides no ideas or suggestions on how this is to be achieved. Even Alan Greenspan, former champion of the free market said this about the greediness of Wall St, "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief." The author wants to restore something that was never there. Since people (especially bankers) have proven time and time again that they will act in their own, immediate, self interest, this simply comes off as a rant by someone who's quite satisfied with the current state of affairs (cronyism included) and doesn't want anyone messing up his (or his cronies') cash flow.
DrSprout 16y ago
>Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. We hear conservative and libertarian voices constantly decrying the expansion of government power, but what about the expansion of corporate power? Government deregulation is totally meaningless when virtually all industries are controlled by a handful of super-corporations with more capital and internal legal structure than most countries. The only way deregulation can have a whisper of a chance of ushering in a better market is if we also insist on the abolition of the multinational corporation, and break up the behemoths into competing regional conglomerates. Of course, without any regulation, a single victor will soon emerge to impose its own will.

78 points by watchandwait 16y ago

I know there has to be some great accountants, CFO's, finance people, etc on HN that can offer more detail about a Repo 105 and what the benefit is for an organization (maybe an individual?) to do this, not just in Lehman's case. WSJ explanation is straight forward, but I would like to hear a little more about this practice--hopefully I'm not the only one. From the article: "We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month."

chasingsparks 16y ago
Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.) IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.) The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up. For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882
- mbateman 16y ago
  Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.

RyanMcGreal 16y ago

>Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. I happen to agree with this definition of the state's duties, but I have a more expansive notion of (3) than most libertarians. For example, universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them, but markets intrinsically cannot produce universal education or health care by themselves. As for the article, crony capitalism is precisely what happens when capitalists control the levers of government.

randallsquared 16y ago
universal health care and education are public goods that generate more market wealth in higher productivity than they cost in taxes collected to pay for them That's not clearly the case, at least for medicine: http://www.overcomingbias.com/2009/07/meds-to-cut.html http://www.overcomingbias.com/2009/07/meds-to-cut.html
- Retric 16y ago
  That does not counter his argument. Demonstrating that highways are more expensive to build in some areas than others does not show that building highways is useless. Extreme Example: If the total cost of universal healthcare is less than the total benefit of universal vaccination then it can be a net gain even if every other dollar was wasted.
ewanmcteagle 16y ago
2 and (especially) your version of 3 are incompatible. Something has to give way. Some of us don't want to give way on 2.
- RyanMcGreal 16y ago
  And some of us don't want to give way on 3. That means we need to learn to compromise. Ideology is neat and tidy; real life is not.

stretchwithme 16y ago

When something is regulated by the government, the nature of that regulation is subject to being influenced by the regulated. If the regulator itself had competition and participation in the regulatory scheme was voluntary, there would be real pressure to honestly regulate. The government could, instead of regulating companies itself, manage a system of competing regulatory regimes and let people decide which one they trust. There could be a "Good Housekeeping Seal of Approval" for accounting competing with FASB, companies could pick one and then publish to investors which one they adhere to. If investors find that they are consistently burned by companies governed by FASB, they would start to favor companies governed by the alternative. There would be real pressure to perform honestly over the longterm that a monopoly is not subjected to. In technology, we have all sorts of competing standards that live and die by how good the results are. Competition is a good thing and we need more of it, especially in government.

eru 16y ago
Yes. That's also a good argument for pushing for power from the federal to the state level. (And for having a federal system, or really small countries in the first place.)
- stretchwithme 16y ago
  Amen. Actual, the competitive situation I described is already in place to a degree. Companies can go public in a different country, which many are doing since the oppressive sarbanes oxley regulations went into effect.
dpatru 16y ago
Government has been defined as a group of people that claim the exclusive right to initiate force against others in a particular area. Government and competition don't go together.
- stretchwithme 16y ago
  Governments compete all the time. If you don't like the way California incorporation works, you can incorporate in Delaware. Even better is the way the Swiss do it. If you don't like the canton you're in, you and your neighbors can join a different one or start your own. It rarely happens, but the fact that it can keeps government responsive. Of course, decisions there are mostly done by referendum anyway, so its hard for government to get far from the people.

diego_moita 16y ago

Oscar Wilde said "a cynic is a man who knows the price of everything but the value of nothing". In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets". And libertarians think societies are just an individual multiplied by n, where n > 1; they ignore that people interact and depend on each other. Besides the list provided, I'd add 4) the state must protect the values of a society, also. Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it. Think of it as a "social infrastructure" akin to strengthening the social fabric or the human ties, of a society. It makes it more resilient to crisis.

orangecat 16y ago
In the same spirit I say "a classical liberal or an economist is a man that believes that societies are nothing more than markets". Ridiculous strawman. If anything, it's the left that acts as though society is a simple system that can be effectively steered by central planning. And of course, selfless regulators will only steer in the right direction... I'd add 4) the state must protect the values of a society, also Which values? Christianity? Defending the sanctity of marriage? Preventing mixing of the races? Universal health care, avoiding abortions, protecting the environment, controlling proliferation of drugs are ethical values. The state must do it because it is just wrong not to do it. Ah, the values that you personally like. And it's wrong to not ruin the lives of recreational pot smokers?

bluedanieru 16y ago

This article is schizophrenic trash. In one breath the author complains that the failure of the market is due to lax regulation and corrupt officials, while in the next he calls for further deregulation and less government oversight. He completely ignores the actual issue brought to light by the financial crisis which is exactly that this same spirit of "deregulation" has squeezed regulatory agencies like the SEC of funding and allowed them to be infiltrated by industry insiders, to all our detriment. The SEC ignored Madoff because they didn't want to rock the boat and even if they did, investigations cost money they don't have. The Wall Street Journal has been a real Newspaper of Liars since it was acquired by News Corp. Get this garbage off HN please.

bluedanieru 16y ago
Oh and speaking of crony capitalism: Mr. O'Driscoll is a senior fellow at the Cato Institute. He has been a vice president at Citigroup and a vice president at the Federal Reserve Bank of Dallas. Perhaps Mr. O'Driscoll, a prime example of what he claims (to his credit) is wrong with the American economy, should take his own advice and quit the think tank.
- hexis 16y ago
  I think his point was about bad incentives, not necessarily bad people. As Cato is neither a regulator, not a regulatee, I'm not sure why his employment there would make any difference.
  - bluedanieru 16y ago
    The influence government policy and are part of the revolving door system he claims is the problem.
    - dsplittgerber 16y ago
      This is just not true. The "revolving door"-system generally refers to the problem that private firms (the regulated) employ people who formerly worked for the regulator, thereby incentivizing regulators to regulate in favor of private firms so as to maximize their job prospects after their government term has ended. While it is true that candidates for governmental positons get temp positions at think tanks, think tanks themselves are neither regulated nor get paid by regulated firms to lobby the regulators to propose beneficial (to the regulated) regulations. So neither Cato nor AEI nor Brookings are part of the revolving door system.

tlholaday 16y ago

Anyone who cites the U.S. constitution and limited government, who does not in the same paragraph acknowledge that the reason government was limited was to protect the power of slaveholders, perpetuates the crime.

astine 16y ago
If you're going to make a claim like that, you ought to cite your sources.
- tlholaday 16y ago
  The 3/5ths clause? The two-senators-each rule to assure that the slaveholding states would have disproportionate power, and the subsequent battles to prevent new slave-prohibitionist states upsetting the balance? Article 1, section 9 (The migration or importation of such persons as any of the states now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person)? The necessity of the 13th Amendment? Sanford vs Scott (4. A free negro of the African race, whose ancestors were brought to this country and sold as slaves, is not a "citizen" within the meaning of the Constitution of the United States. 5. When the Constitution was adopted, they were not regarded in any of the States as members of the community which constituted the State, and were not numbered among its "people or citizens." Consequently, the special rights and immunities guarantied to citizens do not apply to them. And not being "citizens" within the meaning of the Constitution, they are not entitled to sue in that character in a court of the United States, and the Circuit Court has not jurisdiction in such a suit. 6. The only two clauses in the Constitution which point to this race treat them as persons whom it was morally lawfully to deal in as articles of property and to hold as slaves.) ?
  - astine 16y ago
    How does any of this suggest that the purpose of limited government was to protect slaveholders? No one is going to say that allowances weren't made to protect them but the 3/5ths clause has nothing to do with the enumeration of powers or the scope of government. Limited government and slaverights are orthogonal issues and should be treated as such.

Maascamp 16y ago

This article attacks the current attempt to create new regulations without actually providing any alternatives to fixing the problems in the financial system. The author states: "If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets." Yet the author provides no ideas or suggestions on how this is to be achieved. Even Alan Greenspan, former champion of the free market said this about the greediness of Wall St, "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief." The author wants to restore something that was never there. Since people (especially bankers) have proven time and time again that they will act in their own, immediate, self interest, this simply comes off as a rant by someone who's quite satisfied with the current state of affairs (cronyism included) and doesn't want anyone messing up his (or his cronies') cash flow.

DrSprout 16y ago

>Modern liberals have greatly expanded the list of government functions, but, aside from totalitarian regimes, I know of no modern political movement that has shortened it. We hear conservative and libertarian voices constantly decrying the expansion of government power, but what about the expansion of corporate power? Government deregulation is totally meaningless when virtually all industries are controlled by a handful of super-corporations with more capital and internal legal structure than most countries. The only way deregulation can have a whisper of a chance of ushering in a better market is if we also insist on the abolition of the multinational corporation, and break up the behemoths into competing regional conglomerates. Of course, without any regulation, a single victor will soon emerge to impose its own will.