The American Spectator

Bjorn| 3.7.09 @ 2:19AM

Jeffrey,
The heat generated by Rush Limbaugh's debate challenge has been precisely of the duration and intensity predicted.

It is two days later, and no one cares, outside of some formerly prominent conservative eminence grise, now on the outside, looking in.

Perhaps you should take the old saw to heart, and write about something you know?

Basil Plumley| 3.7.09 @ 9:12AM

@ Bjorn

Excellent point! Perhaps, you should try taking your own advice.
At 2:19 AM, may I suggest you "pay attention" to your "lovely wife" instead of Rush, Mr. Lord, and the Conservative Movement. You seem a tad uptight and out of your element in matters needing serious thought.

Anyway, thank you for your post. If continue to hang out here, you will turn into a Conservative. It's futile to resist and your "lovely wife" will be happier.

Bob| 3.7.09 @ 10:07AM

Well, we heard one side from Time and the other side from Quin. For those of us who were in the industry, the answer is in the middle. While Cox did not have the regulatory responsibility of default swaps (because they are really insurance vehicles), he did have responsibility over the underlying derivatives that caused the problems. If the derivatives were valued properly, then capital requirements would have fallen in line. What Quin doesn't understand about capital requirement is that if those derivatives were valued properly, then capital reserves would have needed to be significantly larger. There is no way that the ratings agencies had the computing power to realistically rate derivatives through the iterative modeling stress tests necessary. All they could do is take an historical look at the gross book and use those non-stressed variances.

Those of us in the business knew securitization was a problem in the early 90's. They were easier to value, but then computing power in the early 90's was not what it is today.

The real problem, from a mathematics point of view comes in something we call sensitivity analysis. The hedge fund industry had a huge number of PhD mathematicians doing sophisticated interactive modeling and the SEC and ratings agencies did not keep pace with the industry.

You can't fault Cox about swaps, but certainly the valuations of derivatives were squarely his responsibility. I'm not sure anyone at the SEC really understood the underlying math in derivatives. Cox did not have the math background to recognize this himself, but that takes nothing away from an extremely intelligent, successful, educated individual.

Cox tried to get to the right place through the mark to market valuations. That was a move in the right direction, but again, his lack of understanding of the underlying mathematics and access to sensitivity analyses undermined him.

The other factor that hurt Cox was ideology. Cox believed in free markets and deregulation. If he was going to err, he would do it on the side of lesser regulation rather than more. That said, he would have needed someone in his organization who really understood what those of us in the industry already knew -- the valuations of those derivatives were suspect.

It is hard for me to blame Cox because he was a political appointee who did not have the subject matter capability and knowledge to do his job. But as political appointees go, Cox was one of the most competent in the entire Bush administration. A great manager might have recognized his shortcomings and brought in deputies to cover those areas, but it would have been difficult to get someone who makes millions to accept a salary under $200K.

So, in the end, I don't blame Cox -- he was just unlucky to be in the wrong place at the wrong time. I don't believe you could have found someone who was smarter or more educated than Cox for that position. You would have been slightly better off with someone who did not have as much of a strong deregulation point of view but you won't find many Republicans in that mode.

The basic problem is that self regulation should have occurred at the base level -- the mortgage originator. When they were allowed to securitize their entire book without keeping any risk (which started occurring in the 80's), then their risky mortgages only multiplied the problem as they worked their way through AIG and hedge funds.

As Republicans, we should always talk about personal responsibility. We should also talk about corporate responsibility (but are lax to do so). Since corporations won't do this on their own, we should make keeping risk part of corporate regulation.

Jeffrey Lord| 3.7.09 @ 12:05PM

Basil...

Well said! Precisely!

Deborah| 3.7.09 @ 12:20PM

Mr. Hillyer's article (excellently done) shows the perfect example of what Rush calls the "Drive-by Media. They take their shots, hit some people (hopefully mortally wounding them) and then move on down the road to their next victim.

The Internet has hindered them somewhat because their sales are down (thank goodness!) But, mostly they have damaged themselves. More Americans realize everyday which media they can trust and which media they can't, and they are voting with their cancelled subscriptions. I used to subscribe to Time religiously, but then I woke up to their propaganda about ten years ago, and I haven't read it since.

JP| 3.7.09 @ 4:20PM

Bob, get over yourself already. The cost of risk was near zero during the years 2002-2005 when Greenspan set the rate of interest that banks borrow from at 0%. Banks and mortgage companies could borrow millions at no interest and charge 1 to 2 points over prime to borrowers who were otherwise risky propositions. Mortgage institutions were set to make even bigger profits with ARMs. The mis-use of derivatives was not the fault of Cox. High risk mortgages had to be spread somehow, and the internationalization of this risk taking is what global markets are all about. However, when the cost of risk taking is nearly 0 for almost 3 years it would defy human nature not for a lot of risk taking to occur. The hyper inflation of the real estate markets worldwide had nothing to do with credit default swaps, and everything to do with cheap money. The huge profits firms like Morgan Stanely, Bear Sterns, and Citi reaped were the result of borrowing hundreds of billions at near 0 percent interest, and lending that money 5 to 8%. The demand for real estate and the high yield mortgages that came with them drove up the price for real estate, stocks, and commodities. The profits these derivatives produced generated a worldwide wealth engine that floated all boats.

Unfortunately this fantasy world was dependent on one thing -near 0 interest rates. During Greenspan's final year as Fed Chief, he decided to end the "frothing" and he began raise interest rates. Bernecke continued where Greenspan left off, and by late 2006 the first ARMs began to go into foreclosure. None of this was under Cox's control.

Bob| 3.7.09 @ 5:14PM

JP, you are precisely right that Greenspan was one of the major contributors to the problem. However, this problem started long before 2002 with securitization in the 90's. CDO's were popular back to the late 90's. The train had already left the station. Yes, Greenspan put the industry on steroids, but the separation of risk at the mortgage originator and risk of the loan was already completed in the 90's.

And by the way, if you read my post, I did not blame Cox, I said he was in the wrong place at the wrong time and no political appointee in his position could have done better. That said, someone from the industry would have known but if they were any good, they were making big bucks on Wall Street and would not have joined the SEC.

Everyone has a scape goat. You have the SEC, AmSpec has Fannie and Freddie, others have the mortgage originators, certainly the hedge funds leveraged these vehicles beyond reason, and the ratings agencies didn't have the capacity for proper valuation. I don't put the SEC above these things, and in fact, most of these were more culpable than the SEC.

So where do we really disagree?

liberty4usa| 3.8.09 @ 3:53PM

The liberals have captured the popular culture message control, made anything from the "right" sound bad- but if we dispel these two simple lies we will recapture both hearts and minds without compromising principles...
http://thenma.org/blogs//index.php/libertyforusa/2009/03/07/exactly-wrong