This article shows how securitization has enriched middlemen, while impoverishing lenders. The difference between mortgage rates and Treasury rates is now more than a half percentage point higher than in 1972-8.
Silva, Lauren and Martin Hutchinson. 2007. "The Cost of Complexity." Wall Street Journal (6 September): p. C 14.
"Well, one defense of all the complexity would be that it saved home buyers money -- but that doesn't seem to be the case. It looks like borrowers now pay more for this financial technology. Between 1972 and 1978, in the days when banks offered mortgages to their customers and held the loans, the average mortgage interest rate was 1.07 percentage points higher than Treasury bonds, according to Fed figures. Between 2000 and 2006, when most mortgages were securitized, the spread was 1.59. The figures don't include more expensive subprime loans. One-half percentage point is a big number in debt markets."
"While home buyers may wonder if they are getting their money's worth, financial institutions probably have no so such qualms about the change in the home-lending business over the past 30 years. Mortgage securitization, despite the slide in the subprime sector, has made Wall Street a lot of money."
"Mortgage securitization, despite the slide in the subprime sector, has made Wall Street a lot of money."
ReplyDeleteI've just finished reading a novel entitled 'The Velocity of Money' by Stephen Rhodes. It was Rhodes first work of fiction and written as a Wall Street insider in 1997.
On page 375 he writes:
"When money is disembodied - that is, removed from any material basis such as paper or metal - it speeds up. It travels farther, faster. Circulating money faster has an effect similar to circulating more money. Satellit technology now near-the-speed-of-light, round the clock world stock trading, expanding the amount of global money by 5%. Once digital cash goes global, it will further accelerate the velocity of money. Electronic money is as malleable as digitised information...therefore .. you can now 'hack' finance."
He then goes on to talk about the ability (via computers and computer data) to extract meaningful patterns in the flow of digitised wealth..fractals, chaos theory etc.
Well, rigging the stock market using chaos theory is beyond me right now. However, I was interested in the link between the concept of the velocity of money and Theresa Brennan's observations about how the speed of production has to increase to maintain existing levels of profit. ('Globalisation and its Terrors' page 49). As we have seen since the 1970s the faster production of 'money' (now commodified) and goods has increased profits. 'Fictional' profits, as it turns out.
Global climate change, global ecological catastrophe, global economic crisis.
Hmmm...haven't we been warned about this before?
"For what benefit will it be to a man if he gains the whole world but forfeits his life? Or what shall a man give to buy back his life?"
(Mathew 16:26)
"Only when the last tree has died and the last river been poisoned and the last fish been caught will we realize we cannot eat money".
(A Cree comment)
"Can't buy me luuuve...I don't care for lots of money. Money can't buy me luv."
End of comment ;-)
I thought readers might be interested in this 1993 and 1994 history in relation to the huge failures and huge profits in relation to derivative trading.
ReplyDelete1993 – The accounting director of Nippon Steel Chemical leaped to his death beneath a train after he lost $128 million of the company’s money by using derivaties to play the foreign-exchange market. In Chile a derivatives trader named Juan Pablo Davila lost $207 million of taxpayers’ money..by speculating in copper futures for the state-owned mining company. In Germany the giant conglomerate Metallgesellschaft ..dropped $1.3 billion by betting the wrong way on oil-futures contracts. (bank creditors demanded the layoff of 7,500 of Metallgesellschaft's 46,000 employees and the sale of several divisions as the price for rescuing the company.) . . Hyperion 1999 Term Trust (a $385 million government-bond fund) put nearly one-third of its money into derivatives contracts that amounted to bets that interest rates would not drop anytime soon. When they did drop, the value of the trust's shares plunged about 25%.
1993, April. Goldman Sachs earned $2.7 billion before taxes in 1993, more than any other firm on Wall Street.
....
1994 – 14th February. St Valentine’s Day Massacre for Wall Street. US Federal Reserve began raising interest rates for the first time in five years. This led hedge funds to dump billions of dollars worth of bond futures and thereby drive down the prices of the underlying bonds. The worst fallout occurred in Europe where bond prices plunged and interest rates, which move in the opposite direction of prices, climbed about one full percentage point….Wall Street investor Michael Steinhardt lost at least $1 billion since the beginning of the year representing a quarter of the funds under his management. George Soros lost $600 million on February 14th by wrongly betting that the US dollar would rise against the yen…[In 1992] Soros reportedly earned $650 million and at least as much in 1993, eclipsing Michael Milken’s 1987 record of $550 million. 93
1994 – US small investor money riding on publicly-traded securities climbs from 46% in 1987 to 61%. However “much of the smart money is really riding on computer-generated, hypersophisticated financial instruments that use the public’s massive bet on securities to create a parallel universe of side bets and speculative mutations so vast that the underlying $14 trillion involved is more than three times the total value of all stocks traded on the New York Stock Exchange and twice the size of US GDP”. DERIVATIVES. Pre-tax profits of US brokers and investment banks climbed to an unprecedented $8.9 billion in 1993 due to record sales of every financial product – derivatives, new stock and bond issues, merger financing. .. “Wall Street’s big winners have been firms that are leaders in designing and selling derivatives.”
“…a group of investment funds run by David Askin of Askin Capital Management was forced to liquidate its portfolio -- reportedly worth about $500 million. The funds speculated on the price difference between two different sets of mortgage-backed securities. When interest rates rose quickly, the speculative scheme fell apart.
The information comes from:
The Secret Money Machine. By John Greenwald. Monday, Apr. 11, 1994
http://www.time.com/time/printout/0,8816,980522,00.html
the Orange County financial disaster of 1994 ($2 billion loss) and the Nick Leeson Barings Bank failure need to be added to this list.
What drives this increased complexity? - risk reduction/profit maximization.
ReplyDeleteWhat facilitates or, perhaps, what is it? - spiral-like interacting of neoliberal financial deregulation, new hard and soft technologies, and market fragmentation.
Aside from securitization but I would guess indirectly facilitated by such, also 'things' like dark liquidity pools:
"These pools are basically internal systems for trading stocks privately, off of public exchanges and out of the public eye. They are growing rapidly, both in number and in volume of trades.
Behind the boom in dark pools are large hedge funds and institutional clients that want to build and liquidate large stock positions at lower costs, while also being shielded...
[...]
Exchanges are at a disadvantage as they try to compete with dark pools. The S.E.C. regulates traditional exchanges, and new rules being phased in over the next few months will require them to share information fairly and mandate that trades be routed to whichever exchange gives the best and fastest price.
Dark pools, by contrast, can largely avoid regulation if they keep their trading volumes under a set threshold. This makes them attractive to big institutional traders seeking to avoid being so transparent about their trading patterns that competitors can anticipate their actions or otherwise gain an edge.
The S.E.C., meanwhile, is worried that the fundamental lack of transparency in these pools might lead to price manipulation or other abuses." ('abuses'? bet on it!)
See: Will Dark Pools Swallow Wall Street?
by Kit R. Roane Jul 9 2007
http://www.portfolio.com/news-markets/national-news/portfolio/2007/07/06/Dark-Pools-Grow-Scrutiny-Does-Not
And
Banks begin to dip into ‘dark pools’
By Anuj Gangahar in New York
Published: October 18 2006 21:25 | Last updated: October 18 2006 21:25
http://www.ft.com/cms/s/0/511e0a94-5ede-11db-afac-0000779e2340.html
Not without reason, "Catherine Kinney, NYSE president, told a recent Securities Industry Association conference that these systems were impairing price discovery. She said every share crossed “in the dark” was a share that did not assist the market in determining an accurate price."
With data latency closer and closer to zero, with the ongoing development of algorithmic trading methods,,,the actual globalization of finance has moved beyond possibility of re-regulation. When Al Gore used the phrase 'no controlling authority', he could just as well have been referring to the fussion/fission of overheated, overgrown, fictitious capital.
A very little slice here, a very little slice there, here a little slice, there a little slice, everywhere a little slice ....
ReplyDeleteThese very little slices add up with volume to line the pockets of all the middlemen-women.
No matter how thinly you slice the baloney, you still end up with enough baloney to make a big middleman-woman sandwich.
i think shag points at something often overlooked
ReplyDeletewhile it is "natural" that lenders would seek ways to protect their money and even increase their profits...
it is not obvious that the "free market' will not develop unsustainable behaviors
and, as shag points out, with someone getting paid for arranging these schemes upon schemes the percent of real product left to feed the real workers becomes smaller and smaller.
or shag may mean high frequency automated trading, high-tech 'scalping'
ReplyDelete