Over the weekend I pulled a description of the CMBX index and its associated derivatives from the Internet. "CMBX" stands for commercial mortgage backed securities index. Although I am no novice to structured securities, I was quite surprised at the mind-numbing complexity. The list of parties and acronyms runs on and on: CDS, PAUG, Floating Rate Payer, Fixed Rate Payer, Total Return Swap, Synthetic CMBS ...
"As in the CDX and ABX indices, all administrative issues for the CMBX are handled by Markit(R), who publishes various information including index comparison and price data."
So the black box is run by another black box. No one really knows what's going on.
Who in their rational mind plays in this game ? Like the ultra short ETFs, these are simply trader vehicles to gamble and loot money from the customers, who are fooled à la Madoff into thinking they are part of a great money machine.
The entire financial intermediary industry (banks, insurance companies, pension funds, investment banks, investment companies, mutual funds, etc.) should be prohibited from participating. Warren Buffet was right - these are weapons of mass destruction being handled by testosterone-laden jocks on trading floors. Get rid of it all.
The Solution to the Problem of the Banks
Providing structures for the banks to make profits will attract private capital and the banking sector will be revitalized. Perhaps Geitner's ideas about guarantees could work, if banks or private capital can borrow from the Fed at around 0% and buy the "toxic" assets with some kind of wrap guarantee from the Treasury. That would get them out of the system, as the Brady Bonds did in the early 1980s for Third World loans in default.
I see Lloyd Blankfein, head of the super beefer Goldman Sachs, reads this blog. From his writings in FT today: "In this vein, all pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation."
That means hedge funds.
Word of the Day
"Baneful" - adjective [$10] from the file
Baneful means 1. poisonous; 2. productive of destruction or woe.
Sentence: Baneful financial product derivatives have contributed immensely to the credit market turmoil as too much money became tied to them.
Le Mot du Jour
"Envenimer" - verb; regular 'er' conjugation.
Envenimer means (transitive) to make septic, to poison, to inflame, to aggravate.
La Phrase: Les produits dérivés enveniment les établissements financiers.
Sentence: Derivatives poison financial institutions.