This page has been archived and commenting is disabled.

Dear Senator Corker: Meet The HVol 4 And Basis (Prop) Trades That Destroyed Merrill Lynch

Tyler Durden's picture




 

In the past Zero Hedge had respect for Ten. Senator Bob Corker due to his opposition to the nationalization of the bankrupt automakers and making them yet another ward of the ever larger central-planning state. However, after today's hearing with Paul Volcker on the Prop trading ban, any respect we may have had for the Senator has promptly dissipated. While we understand that the pointless bashing of Volcker's proposal by Corker was predicated by his sizable lobby interest (over $21 million raised in the course of his career) and his talking points were undoubtedly a transliteration of a memorandum submitted by one of the Too Big To Fail banks that stand to experience substantial losses should the Volcker proposal pass, one line of argument in Corker's speech that is flagrantly flawed was Corker's naive rhetorical question whether there has been a single instance during the financial crisis where a commercial bank engaging in proprietary trading led directly to that institution failing or having to be bailed out by the taxpayer. Corker assumed the answer is no and kept pouncing on that answer. Well, Senator, you are wrong - meet Merrill Lynch, incidentally one of your biggest financial backers. Also, please meet Merrill's prop basis trade and its prop HVOL4 trade, which combined were the primary reason for the firm's $15 billion writedown in Q4 of 2008 and the subsequent bail out of the firm by Bank of America.

In January 2009, the Wall Street Journal ran an article titled "At Merrill focus is now on Montag, sales chief" in which the newspaper indicated that the bulk of the firm's losses were due to a recognition of a major prop position on Merrill's books gone horribly wrong:

In December, Mr. Montag and his team worked with Bank of America executives handling due diligence on the securities firm to understand the full extent of the losses, according to a person familiar with the situation. The problem then was brought to the attention of Mr. Lewis. Messrs. Montag and Thain have maintained that the losses stemmed largely from old positions that Merrill inherited from previous management.

Behind some of the [firm's $15.31 billion in losses] in the quarter are two related trades that Merrill hasn't discussed publicly in detail.Broadly, both trades are set up to generate returns from corporate bonds while hedging the exposure to the debt through derivatives using credit-default swaps. Those derivatives provide protection against defaults on the bonds.

Merrill, according to a person familiar with the situation, ran two versions of the trade. One was a plain-vanilla strategy while the other was a more complex version. According to this person, Merrill was one of the biggest traders in the complex trade among U.S. firms. European banks made similar trades.

The idea is that the two sides of the trades -- either the plain-vanilla version or the complex bet -- are supposed to move in tandem. For both trades, things went awry in the fourth quarter when bank-lending markets froze. That ultimately triggered a sharp drop in bond prices. The value of default insurance rose, but not enough to cover the drop in the bond pricesBroadly, both trades are set up to generate returns from corporate bonds while hedging the exposure to the debt through derivatives using credit-default swaps. Those derivatives provide protection against defaults on the bonds.

The trade in question is the basis trade, which incidentally also resulted in the blow up of Deustche Bank's prop trading group headed by one Boaz Weinstein, who lost a billion dollars on the exact same trade.

Zero Hedge previously discussed the implications of the basis trade blow up in depth as it pertains to Merrill Lynch, providing observations on how just one simple leveraged prop position (yes Senator Corker, prop) ended up destroying the bank.

So back to our original topic. How could Merrill lose $15 billion on
basis trades? And not just Merrill: Boaz Weinstein's group at Deutsche
Bank lost over $1 billion on this same trade, and basis trades are the
main reason why Citadel has lost over 50% in 2008. Anecdotally, basis trades on CDOs are the reason why AIG, and most of the U.S. insurance industry is in its current deplorable state.

How
would one go about estimating the P&L impact to these asset
managers? It is not difficult: as the basis explosion resulted in a
mismatch of DV01, or dollar equivalent change in 1 bps point in both
bonds and CDS, or, netted out via the basis trade itself, one can
calculate what the adverse MTM impact was on any notional position. If
we take the CIT example above, and we assume that Merill had a $10
billion notional basis position in the name (this is an
oversimplification but it was probably true for their overall basis
portfolio), and the spread blew out from 0 to 1,500 bps around the time
of the Lehman events, Merrill would have experienced a roughly $6
billion hit on the position (an average DV01 of $4MM), which implies
that a $15 billion loss could have been created as simply as
experiencing a blow up on $25 billion on basis trades. And this assumes no leverage which is naive for the prop desk model:
if ML had leveraged its preexisting basis trades even 10x, the total
basis trade notional needed to create this loss would have been only $2.5 billion.
Is it inconceivable that ML had $25 billion in basis trades? Not at all
- after all they were a preeminent CDS trading powerhouse and had one
of the most active basis trade prop desks.

And just in case the basis trade only accounted for a majority (but not all) of the losses, the Merrill HVol 4 prop trade, which cost at least another $1 billion, sealed the coffin. From the Financial Times

Mounting losses at Merrill during December almost derailed the acquisition. Ken Lewis, BofA’s chief executive, threatened to walk away from the deal unless the US government provided $20bn in extra capital. The deal closed on January 1 after federal officials pledged their support.
People familiar with the matter said BofA had dispatched Neil Cotty, its chief accounting officer, during the fourth quarter to work with Merrill’s finance team. They said Mr Cotty played an active role in preparing accounts, wielding influence with Merrill executives who were set to report to him and other BofA officials after the deal closed.

With Mr Cotty’s involvement in December, the people familiar with the matter said, Merrill took a fourth-quarter writedown of $1.9bn in leveraged loans and a $2.9bn reserve against an exposure to derivatives linked to asset-backed securities.

Mr Cotty also gave his blessing to a $1bn writedown of credit default swaps involving investment grade companies. The markdown of a position on the “high vol 4” index transformed a gain of $100m into a loss of $900m, said a source familiar with the matter.

In a statement issued by BofA, Mr Cotty said: “While BofA had access to Merrill’s financial information in the fourth quarter and had input into many accounting policy and valuation issues, Merrill management was responsible for these decisions regarding the marks and other valuations.”

It is thus extremely short-sighted of Mr. Corker to make such unjustified rhetorical questions all for the sole purpose of making the Volcker proposal seem disingenuous. The truth is that prop trading was the sole culprit for Merrill's collapse and the resultant purchase of the firm by a taxpayer-subsidized Bank Of America. It is extremely ironic that Volcker, who is trying to prevent the kind of 11th hour taxpayer rescue in the future, should be the target of your polemics. However, when there are financial interests to be defended, many of them undoubtedly critical to the very firm who handed you the question sheet that you used when interrogating Mr. Volcker, we fully understand that your allegiance lies with Wall Street and its continued way of kleptocratic life, and not with your constituency which will once again have to spend billions if not trillions of hard-earned dollars to bailout the very same Goldmans who are currently doing their best to make Volcker seem like an old fool.

Luckily for your electorate, and for the US taxpayer in general, there are those who are happy to call you on your male bovine excrement when the time comes. And this is just one such time.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 02/02/2010 - 18:50 | 215326 Forbes
Forbes's picture

Hey, the party is going just fine. Don't take away the punch bowl.

Tue, 02/02/2010 - 21:20 | 215453 TraderMark
TraderMark's picture

Senator Shelby to Maria B: "Volcker rules! Dat's for the birds.  We gots a regulator who will take care of this."

nevermind that this regulator just missed the biggest bubble of all time.  Or didnt catch LTCM until it threatened the system.  Those errors will never happen again - screw Volcker and his so called "protecting the system".

(5 minute video)

http://www.fundmymutualfund.com/2010/02/senator-shelby-we-dont-need-no-stinkin.html

Wed, 02/03/2010 - 04:00 | 215657 Anonymous
Anonymous's picture

The Responsibility Party needs your help

1) No more too big to fail
Let savers win and gamblers lose

2) National Sales Tax of 12%
Get it done with these funds or don't do it

3) End the corporate lobby capture of Government

4) Exchanges for trade of all financial instruments that are truly regulated

Who's with me?

Tue, 02/02/2010 - 18:55 | 215329 Cheeky Bastard
Cheeky Bastard's picture

They are all whores, with the exception of Paul, Kucinich, Sanders and Grayson ... 

Tue, 02/02/2010 - 19:11 | 215343 VegasBD
VegasBD's picture

I thought the same bout Greyson. But then I signed up to receive his emails and now realize hes just another crummy congressman. Dont get me wrong, long the fact that he rips the Fed a new one everytime but that comes from the fact that hes a EuroPac Client (Peter Schiffs Company) and found it an easy way to raise large sums of money from the anti-fed crowd.

Tue, 02/02/2010 - 21:04 | 215441 Cheeky Bastard
Cheeky Bastard's picture

Goddamit, sometimes I'm just so naive i want to hit myself in the face with a shovel ..

Tue, 02/02/2010 - 21:34 | 215481 nopat
nopat's picture

At least it'll keep you from punching yourself in the dick...

Tue, 02/02/2010 - 21:09 | 215446 milbank
milbank's picture

And the problem is???

Tue, 02/02/2010 - 19:28 | 215366 Anonymous
Anonymous's picture

Whj dignify them by classifying them with whores?

Whores are saints with a ticket to heaven compared to what passes for a bureaucrat, our politicians, who are really our enemies, to be smote with extreme prejudice.

Tue, 02/02/2010 - 21:32 | 215478 Cheeky Bastard
Cheeky Bastard's picture

i dont even consider them bureaucrats, but little, insignificant, shit-for-face aparatchicks, easily replaceable,  easily forgettable.  

Tue, 02/02/2010 - 21:07 | 215443 milbank
milbank's picture

I totally agree.  Paul, Kucinich, Sanders and Grayson. 

These hearings expose the interrogators more than the interrogated.

Congress is a bought and paid for shitshow.

"We The People" are on our own.

Wed, 02/03/2010 - 09:48 | 215731 Anonymous
Anonymous's picture

Amen

Tue, 02/02/2010 - 19:00 | 215335 ArkansasAngie
ArkansasAngie's picture

And now Lanche Bincoln calls herself an independent fiscal conservative.

Ladies and gentlemen, boys and girls, we got some world class horse manure going on here.

Where in heck is John Wayne when you need him.

Tue, 02/02/2010 - 20:05 | 215401 Miles Kendig
Miles Kendig's picture

Dealing with another Angie at Rio Bravo..

Tue, 02/02/2010 - 21:18 | 215451 milbank
milbank's picture

Understand, John Wayne was a character who played characters in movies. In real life, Marion Morrison was no hero.  He was a right-wing racist wacko coward who, amongst other things, avoided going into WWII under a sham pretext so he could further his career while his competition was in uniform.  Some, like Stewart and Gable actually seeing action.

Of course, Marion had no problem with others dying to protect his hypocritcal hide.

Wed, 02/03/2010 - 06:42 | 215677 jeff montanye
jeff montanye's picture

thanks for the needed clarification.

Tue, 02/02/2010 - 19:01 | 215336 Anonymous
Anonymous's picture

Maybe a revised Volcker Plan could just put an end to basis trades.

Tue, 02/02/2010 - 21:43 | 215491 lizzy36
lizzy36's picture

You know what puts an end to bad trades:LOSSES owned by the entity who took the risk in the first place. 

Wed, 02/03/2010 - 00:36 | 215616 What a mess_man
What a mess_man's picture

--+10--

Exactly!

Wed, 02/03/2010 - 06:43 | 215678 jeff montanye
jeff montanye's picture

as volcker's nyt oped makes clear he wants to do.

Wed, 02/03/2010 - 09:26 | 215722 Miles Kendig
Miles Kendig's picture

Nothing but net!  WhoT!

Tue, 02/02/2010 - 19:19 | 215357 Cursive
Cursive's picture

Money is the lifeblood of politics.  Corker is getting plenty from the banksters and SCOTUS is more than happy to open the spigot wider.  I think it will backfire, anyway.  You can only beat a dog so long until he fights back.

Tue, 02/02/2010 - 20:07 | 215402 Rainman
Rainman's picture

The cowards and traitors are at least predictable. All for sale.

America needs a 21st Century Constitutional Convention. First order of business is to move the Nation's Capitol to Des Moine, then convert all D.C. public buildings into museums ....so we can visit often and never forget how fukked up it all got.

Politicians perched in halls of taxpayer-owned opulence while they steal us blind is obviously not a good idea.

Tue, 02/02/2010 - 20:23 | 215409 Anonymous
Anonymous's picture

Wouldn't Detroit be more appropriate?

Wed, 02/03/2010 - 11:52 | 215844 Dburn
Dburn's picture

The Mohave from May to Sept. No A/C. Tents and Flying Red Ant Protection (hah). $100 extra pay if they can hit a sidewinder rattlesnake from 100 Yards with a .22 derringer. Gives them something to do if they don't die of a heart Attack.  

 

"First thing you boys have to learn out here is ;

don't pick nothin' up. Ya hear?"

 

 

Tue, 02/02/2010 - 21:31 | 215471 milbank
milbank's picture

Des Moines?  Lovely. Next you'll be wanting Larry Dickman for be President.

http://www.hulu.com/watch/55113/mr-warmth-the-don-rickles-project

Tue, 02/02/2010 - 22:23 | 215521 Screwball
Screwball's picture

America needs a 21st Century Constitutional Convention. First order of business is to move the Nation's Capitol to Des Moine, then convert all D.C. public buildings into museums ....so we can visit often and never forget how fukked up it all got.

I think your on the right track.  Let's change those buildings in D.C into prisons.  Let me check my calendar...ok...Monday is good for me.  You in?

Wed, 02/03/2010 - 11:24 | 215816 Cognitive Dissonance
Cognitive Dissonance's picture

Maybe not. Considering the rampant greed and corruption on display today, don't forget that once a constitution convention is opened, the ENTIRE constitution is up for revision. You can't restrain the convention to certain parts.

If the powers that be want even more power, this would play into their hands. Once they get the changes they want, they will use the corruption to ram it through the state houses, under martial law if need be.

Don't underestimate these guys.

Tue, 02/02/2010 - 19:25 | 215361 Whatdoesitallmean
Whatdoesitallmean's picture

His performance makes me sick, the bankers (GS/MS/JPM...) should be proud.

Tue, 02/02/2010 - 21:04 | 215363 Miles Kendig
Miles Kendig's picture

This effort has left me better informed, refreshed, entertained and reflective of the current state of modern American conservatism.  Or what passes as such from the mouth of Senator Corker.

Tue, 02/02/2010 - 19:45 | 215382 Anonymous
Anonymous's picture

Wealth without labor is dangerous. And the worst part is the middle/lower working class have lost their influence on the government.

Citi just raised my AA advantage cc balance interest rate by 400 basis points. I have been citi card holder for 20 years, with no bad days.... I called the bastards yeseterday to understand, said had to raise rates to keep loaning money in this environment. I said let me get this right, your bank is one of the primary crooks in the crime of the century and now you borrow money at .5% and want to charge me, a loyal, profitable customer 18.99%???

Banks are a souless entities. At what point do the people break into the bastille?

-Lunatic Fringe

Tue, 02/02/2010 - 20:33 | 215416 Anonymous
Anonymous's picture

You must have been a very profitable customer - Citi raised mine to 29.99 - and then cancelled me a few months later (probably because I would pay in full every month and still get the 1% cash back)

Wed, 02/03/2010 - 00:13 | 215598 perchprism
perchprism's picture

 

They raised mine to 18.99% too.  I called and told them to cancel my card, so I was shunted to a supervisor to get me to change my mind.  "Tell us what you want us to do to keep you as a customer," the lady said.  "Hear that noise?" I replied.  "That's the sound of your credit card getting scizzored up.  There's nothing you can do."  Oh yeah, I said something too about how they were able to get money for nothing at the Fed discount window, and then turn around and charge me 19%---outrageous.

I now have two new cards--Chase and Discover--with 0% introductory that I transferred the Citi balance to.  0% for 8 months, enough time to pay it off.

 

 

 

 

Tue, 02/02/2010 - 19:52 | 215391 Anonymous
Anonymous's picture

Exchanged many emails with Corker and his kid banking staffer. He's a financial services shill and has not only lost my vote, but will make sure my Tennessee bretheren know he is one.

Tue, 02/02/2010 - 21:02 | 215435 Miles Kendig
Miles Kendig's picture

Here in the Shelby County portion of Marsha Blackburn's TN-7 district there is already an excess of 100K ready for Corker's opponent in 2012 due to Corker's total conflation of conservatism with kleptocraticism.  Too bad that whoever is opposite Corker on the ballot will most likely be an identical shill for the financial services industry.

Tue, 02/02/2010 - 21:22 | 215457 Anonymous
Anonymous's picture

if you are looking for a credible opponent in
the dem or repub parties you are wrong wrong
wrong....

Wed, 02/03/2010 - 06:58 | 215681 jeff montanye
jeff montanye's picture

what is the answer?  what kind of law or constitutional amendment would take the money whoring (somewhat) out of politics?  this seems like the root of the problem.  since major contributions seem to pay off 100 or 1000 to 1 the corporations and rich won't stop.  and since the politicians need enormous funds to finance campaigns they can't stop.  what stops it?  don't say pitchforks or beheadings because that's not happening and if it did it would be worse by orders of magnitude.  

Wed, 02/03/2010 - 09:21 | 215692 Miles Kendig
Miles Kendig's picture

As long as the music is playing we must continue to dance - Chuck Prince, CEO Citi

Ya, too bad the concept of self restraint is lost to those in the public & "private" sectors who rely upon the policy of judicial exclusion to do their work.

Wed, 02/03/2010 - 08:24 | 215698 Miles Kendig
Miles Kendig's picture

Credible?  ROFLMAO.  There is no such thing as credibility or loyalty to the Constitution to be found among the political class of the United States, a couple of noteworthy examples excepted.  Still, one must do what one can until more of society catches up.... Especially those whose oath to the same Constitution is actually considered binding.

Tue, 02/02/2010 - 19:55 | 215394 IveBeenHad
IveBeenHad's picture

its a shame too that the guy spearheading the effort is like 90... its easy for his opponents to scream "crazy old man". 

 

another epic piece though. 

The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic. 

-JFK 

 

Tue, 02/02/2010 - 19:55 | 215396 Zippyin Annapolis
Zippyin Annapolis's picture

Treasury should clarify-- if Geithner Really is In favor of the Volker proposal (wink, wink--not). Larry and Timmy thought crazy uncle Paul was safely locked up in the White House attic until the WH political spin doctors found the key--can you say "focus group"?

Tue, 02/02/2010 - 19:56 | 215397 Anonymous
Anonymous's picture

Just out of curiosity, what was the answer when Corker asked the question? Was it just a dumb look or did the interviewee fire back with some evidence?

Tue, 02/02/2010 - 20:24 | 215411 rawsienna
rawsienna's picture

Dont forget about the 40bb of Resi CDO exposure they had on their books at the end of Q2 2007 - Guess it was one of those custy trades that became a prop trade. 

Tue, 02/02/2010 - 20:25 | 215413 Anonymous
Anonymous's picture

whomever survived that prop desk made a fortune in bonuses while some folks were thrown under the bus.

why isn't the public outraged that those guys are taking home giant paychecks at their expense after taking outsized risk?

Tue, 02/02/2010 - 20:31 | 215415 Anonymous
Anonymous's picture

We are being completely and utterly SCREWED by people like Corker--the very people we elected to protect our interests!

VOTE this self-serving SCHMUCK out the first chance you get, Tennesee!!

Tue, 02/02/2010 - 20:53 | 215428 andrew123
andrew123's picture

Tyler, if the "Volcker rule" is that the regulators will enforce a prop trading ban, and that they will know "prop trading" when they see it, does the Volcker rule really have any teeth at all?  I am asking seriously, as you seem to think this is a big deal.  Won't GS claim its hft is really just market making, ie. "customer facilitation"?  Won't the same logic be applied to all its debt and derivative business, and to the extent regulators do think prop trading is going on, won't the fact that they always make money be used to argue for very lenient capital treatment?

Tue, 02/02/2010 - 20:53 | 215429 Anonymous
Anonymous's picture

Volcker doesn't need to "fire back" at questions posed by transparently corrupt and ignorant Senators. Just sitting there, looking back, with his gravitas, is enough.

Tue, 02/02/2010 - 20:54 | 215430 Anonymous
Anonymous's picture

Now that we live in the third world, y'all need a crash course in third world politicians.

Tue, 02/02/2010 - 21:19 | 215454 no cnbc cretin
no cnbc cretin's picture

I don't think Volcker is going to save this sinking ship. He might slow it down, that's all. Personally, the US is in a major Depression. That's the good part. But, when you include all the debt, gov., public, private, as well as no mfg'ing in this country, 70% of GDP is based on the consumer. Two bogus wars. The real national debt is around 80 trillion. Then add this to the mess: http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php - not to mention the mass corruption going on in this country. - we're SCREWED! Seems to me the only way to fix it, is for a complete collaspe. That's the direction we're headed in anyway.

Wed, 02/03/2010 - 00:21 | 215602 perchprism
perchprism's picture

 

Realistically, when we know it'll take several years of disciplined austerity to get out of the hole, we know that's just not politically possible, right?  So the only alternative is to junk the system and start over.  Let it go, then, I say, and get it over with.

 

 

Tue, 02/02/2010 - 21:21 | 215456 deadhead
deadhead's picture

Obama's group is really phucking up like a bunch of amateurs, really.

As for Corker, his anti nationalization stance had a lot more to do with all those non union auto shops on his turf versus some philosophical stance.  Just another member of Congress bought and paid for who simply doesn't understand the systemic risk still posed by a small group of oversize banking institutions, still propped up by government guarantees, easy Fed money, and legitimized fraudulent accounting masking as the revised FASB FAS 157 mark to menagerie paradigm.

For those young enough here, when you read the history of this 20 yrs down the road, you'll see that the Treserve/Wall street complex phucked the USA over big time.

 

 

Tue, 02/02/2010 - 23:51 | 215586 milbank
milbank's picture

History is written by the winners.

Wed, 02/03/2010 - 08:27 | 215701 Miles Kendig
Miles Kendig's picture

There it is.  Never forget this DH....

Tue, 02/02/2010 - 21:23 | 215462 Hondo
Hondo's picture

Both Corker and Shelby are idiots on the take.  This government (both sides) is as corrupt as you can get.  It's flat out stealing from the American public.............

Lead and brass.......the time is drawing near.

 

Tue, 02/02/2010 - 21:28 | 215470 Anonymous
Anonymous's picture

The senators of this country are perhaps the most corrupted. Most are wealthy and are looking to protect their own financial assets, not protect the American people.

Under this regime, there is virtually no way a small business can prosper, but bankers are almost guaranteed to make more money than ever.

Sad state of affairs in this country

Tue, 02/02/2010 - 21:37 | 215485 JR
JR's picture

Tyler, thanks for the dressing down of Corker.  It’s not enough that Congress was clipping lobbyist coupons while the investment banks, with the Fed playing linebacker, emptied the treasury.  It’s not enough that the Bush-Paulson and Obama-Geithner teams wear the same color uniforms (Goldman-Morgan green).  And it’s not enough that our young president is a recipient’s dream and a producer’s nightmare.  Obama, backed by a soak-the-“rich” Congress just itching to buy everything in their dreams, is a faux deficit hawk, in spite of what spend, spend, spend Krugman feigns to believes. After all, Charlie Rangel is going to need some cash for his projects and that means fees, taxes, and abolishment of tax deductions for the “rich”—i.e., that single guy or gal working 24/7 in New York or San Jose earning $200,000 in hopes of buying a home and/or that “rich” couple next door earning $250,000.   Bankers siphoning billions in bonuses aren’t the rich, of course; that’s just the cost of doing God’s work.

Here are comments by economist William L. Anderson nailing Krugman to the wall:  MARCH OF THE PRINCETON PEACOCK | February 2, 2010

In his January 29 column, "March of the Peacocks," we see proof of what I have been saying for years: Paul Krugman is not an economist. He is a political operative, period.

OK, why do I claim that a NOBEL LAUREATE in economics is not an economist? Is not the Nobel given to someone who has contributed something important to economic science? (Not really, but that will not be the topic of discussion today, as this column is dedicated to debunking the wit and wisdom of Paul Krugman, not trashing the Swedish Academy of Sciences, which gives the award.)

Instead, we deal with Krugman's latest missive of rage that Obama has announced a toothless "spending freeze," which apparently turns the poor president into a ... Republican. Besides Krugman's gratuitous insults of President Obama, however, I also think this column presents a very good view of what Robert Higgs calls "vulgar Keynesianism." So, let us begin.

Right out of the box, Krugman proclaims:

Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.

Horrors! Obama has endorsed such a scheme, and The Great One is enraged:

What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.

So, let us stop for a moment and think. What is a "dumb policy idea"? Why, according to Krugman, it is anything that lessens the burden that government place on individuals. And it gets better:

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

Only in Paul Krugman's Wonderland can such a series of words be put into one supposed coherent thought…

In fact, why create "jobs" at all? For Krugman, everything is based upon spending, spending, spending. Why not just give everyone bagfuls of money and let them quit working? After all, in the Keynesian world, an economy magically appears when we start spending money...

Here is the problem. Krugman has endorsed time and again government initiatives that increase the burdens that private businesses must bear. (No problem to a Keynesian, as the increases in costs require more spending which – Presto! – creates prosperity.) In the real world, when businesses bear heavier burdens and consumers cannot pay higher prices, we have this thing called bankruptcy.

Furthermore, when companies like General Motors and Chrysler are no longer solvent, that means that the sum of their assets is greater than the whole of the company, the very definition of being bankrupt. But instead of allowing those assets to be liquidated and turned over to companies that can run them profitably, Krugman and his Keynesian-socialist friends demand that government prop up those companies, which creates a further drain on the economy...

Read more: http://www.lewrockwell.com/anderson/anderson277.html

May we add investment banks to that last definition...

Tue, 02/02/2010 - 23:39 | 215577 gookempucky
gookempucky's picture

Americans do not need jobs--just drugs.

by harriet fraad

http://www.alternet.org/media/145481/why_are_americans_passive_as_millions_lose_their_homes%2C_jobs%2C_families_and_the_american_dream?page=1

 The Drugging of America

The fifth tributary that helped to create our deluge of disaster is both a cause and an effect of America's social breakdown. This is the numbing of Americans with psychotropic drugs. In 2006, Americans, who make up approximately 6 percent of the world's population, consumed 66 percent of the world's supply of antidepressants. In 2002, more than 13 percent of Americans were taking Prozac alone. Prozac is one of thirty available antidepressants. Anti-anxiety drugs, such as Zoloft, are so widely prescribed that in the year 2005, the $3.1 billion sales of Zoloft exceeded the sales for Tide detergent

Wed, 02/03/2010 - 07:16 | 215684 jeff montanye
jeff montanye's picture

want to reduce the deficit? stop the foreign wars and rein in the defense department.  stopping blind support of the likud would do more to stop terrorism than all the drones and bombs.  you also have more faith in the self-correction of the market than i:  reducing the federal deficit now seems unlikely to end the recession/depression.  whether we get to see the experiment tried remains to be seen.  i'm betting no.

Wed, 02/03/2010 - 12:41 | 215929 JR
JR's picture

I agree, with all of the above.  This Fed-engineered economy is heading 100 mph into a brick wall.

Tue, 02/02/2010 - 21:37 | 215486 lizzy36
lizzy36's picture

You do good work, Mr.Durden.

Tue, 02/02/2010 - 22:51 | 215543 agrotera
agrotera's picture

I am a TN resident and have received NO response from Senator Corker for my requests for him to support S604 unlike our other honorable senator Alexander who at least took the time to write and respond to my inquiries and requests.

Corker on the other hand came out with his own version of what should be done with the Fed so he could proclaim how hallowed the Fed was and how we must preserve it's "independence" when what he really meant was that the Fed need not be exposed for financing him and most other politicians in our captured legislative branch (in addition to the executive branch.

I will ACTIVELY campaign against this man since he has proved himself to be a bank shill...and i could say more if i weren't concerned about keeping my image as a well mannered Southern girl.

Tue, 02/02/2010 - 23:02 | 215553 JR
JR's picture

+ a millie, agrotera.  And you’ll always be a Southern belle.  I've missed you.

Tue, 02/02/2010 - 23:21 | 215562 agrotera
agrotera's picture

duplicate...sorry

Tue, 02/02/2010 - 23:19 | 215565 agrotera
agrotera's picture

I have missed you and all our friends!!!  Thank you so much JR!!!!!

Wed, 02/03/2010 - 09:13 | 215714 Miles Kendig
Miles Kendig's picture

Another Volunteer!  No wonder you write the way you do

Tue, 02/02/2010 - 23:03 | 215555 Anonymous
Anonymous's picture

Corker will be voted out. TN will not stand for having this banking shill/hipocrite represent us.

I will email this article to everyone I know in the area, and urge everyone to do the same. I have also copied my contacts at MSN, CNN and HUFPO.

Corker is a Crook!

Tue, 02/02/2010 - 23:05 | 215556 Anonymous
Anonymous's picture

Corker's a neo-con/statist. All you need to know is Larry Kudlow promotes him. And who's behind "Bagdad Bob" I mean Larry Kudlow?

Wed, 02/03/2010 - 00:26 | 215604 JR
JR's picture

[W]e fully understand that your allegiance lies with Wall Street and its continued way of kleptocratic life, and not with your constituency which will once again have to spend billions if not trillions of hard-earned dollars to bailout the very same Goldmans who are currently doing their best to make Volcker seem like an old fool…

Dang! that’s good!

Wed, 02/03/2010 - 02:34 | 215643 Apocalypse Now
Apocalypse Now's picture

I watched the exchange live and was surprised how ridiculous Corker was, he should have put a cork in it - he came off looking sophomoric while trying to look smart by making  some irrelevant technical point.  He kept stating that unless someone could give him an example "my statement stands".  It sounded like a college student lecturing Warren Buffet on investing.

Volker's response was classic, stating that he didn't want his tax money going to speculation and was surprised why anyone (Corker) would resist that common sense.  He also later added that the bankers know what trading against their clients means, and that the questioners shouldn't be fooled if the bankers feign ignorance on what it is.

I did like the concept of questioning how to prevent the next AIG in the future and that financial regulation legislation should consider that for comprehensive financial reform.  However, the way it was brought up seemed like the intention was as a diversion.

Wed, 02/03/2010 - 09:07 | 215717 Miles Kendig
Miles Kendig's picture

The; "Unless this fix fixes everything then any attempt to fix anything is a waste of time discussion".  Exactly what I have come to expect from a body that has rendered itself moot through its preference for government through Royal Decree, OOps, Executive Order relieving legislators of the need to actually vote on anything.  Joint Resolutions and naming post offices excepted.

Wed, 02/03/2010 - 04:38 | 215663 Anonymous
Anonymous's picture

Saying "prop trades" are the only reason why Merrill had to be taken over by BoA sees like a bit of BS to me. You are clearly trying to distort the argument for your own purpose. Prop trades of this sense were NOT the cause, or even a major contributor to the crisis. Obviously when there is a massive dislocation in all markets, all securities firms will by definition be affected. Seems non too smart reasoning to me.

Wed, 02/03/2010 - 07:26 | 215687 jeff montanye
jeff montanye's picture

imo prop trades are not the root problem.  it is too big to fail.  if, for whatever reason massive dislocation in all markets -- that they are supposed to make their business -- they are insolvent, they get taken through an orderly receivership, management replaced, shareholders wiped out, bad assets separated, bond holders pay the difference between cost and market, going concern part of company resold, proceeds reimburse taxpayers for transitional expenses.  like most of the banks fdic dealt with.

Wed, 02/03/2010 - 04:42 | 215665 Anonymous
Anonymous's picture

"if ML had leveraged its preexisting basis trades even 10x, the total basis trade notional needed to create this loss would have been only $2.5 billion. "

your maths doesn't make a jot of sense...

You'd still need $25bn of basis to make the loss you said, no matter how many times you lever...

And assuming their entire portfolio blew out 1500bps is very misleading

Poor article.

Wed, 02/03/2010 - 05:11 | 215669 Rick64
Rick64's picture

BOFA is quite the ventriloquist. I heard everything they had to say and I didn't even see their lips move, and the dummy seemed so real .

Wed, 02/03/2010 - 06:43 | 215679 Giovanni Zucchetti
Giovanni Zucchetti's picture

Is this the Coker question:

"There's not a single bank holding company that had a commercial bank that had material issues that were related to proprietary trading," Corker said. - CNN

BHC?

Wed, 02/03/2010 - 07:10 | 215683 Anonymous
Anonymous's picture

F' em all. Dodd the shill wiggles himself out of his usual
bagman for Wall Street roll by complaining it's a too complex task to get the cooperation of other shills like Corker.

Wed, 02/03/2010 - 10:10 | 215752 crosey
crosey's picture

I'm from TN, have met Sen. Corker on several occasions, and found him to be unusually bright in fiscal matters, for your typical politician.  He did run finances for the state under one governor, so he has some insight into this machine.

I queried him about a year ago on his position regarding the proposed legislation taxing day trade transactions.  His response was polite, but meandering.  That left me questioning why he put so many tangents in his response.

I see two prime movers in the political landscape:  1) the complexity of the global financial market system is WAY beyond the comprehension of 80+% of politicians, and 2) politicians will, forever, acquiesce to campaign funding and its related policy price.

As such, we will never escape the cycles of boom and bust, because the predicating factors will always be present.  What will change will be the scale, and it's trending larger.

Wed, 02/03/2010 - 10:26 | 215770 Anonymous
Anonymous's picture

This is NON-SENSE.

Basis trades are not significant in the losses of Merrill, Citadel, Boaz.

Whoever wrote this, simple does not know much about CREDIT losses, which were the source of MTM losses last fall. Banks are exposed to credit (surprise!). Small banks have had a worse time than large banks without "prop" trading.

At the end of the day, banks make loans. These loans are "prop" exposures just as customer trading capital committments are...

Volker is old.

Do NOT follow this link or you will be banned from the site!