Revanchist Bankers
The central thesis of my Interregnum meme is "the old is dying, but the new cannot be born". This is because the revanchist forces still fight from their bunkers. Case in point, the Big Banks are fighting Obama on derivative reform.
For credit-default swaps, information about intraday trades and prices has long been controlled by a handful of large banks that handle most trades and earn bigger profits from every transaction they facilitate if prices aren't easily accessible.For example, credit-default swaps tied to bonds of companies such as General Electric Capital and Goldman Sachs typically have a pricing gap of 0.1 percentage point between the bid and offer price. That translates into a $40,000 margin for every $10 million in debt insured for five years. Greater price transparency could narrow that gap, lowering costs for buyers and sellers but reducing fees for banks.
Goldman Sachs and the other big trading banks have never liked transparency, because their trading and arbitrage profits have always been based on an information imbalance.
Why would they want to change this?
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This is very apropos of the conversation we've been having with Kevin Phillips and Russ Baker re: the Bush family (with their background in the Liberty League, oil, banking, arms trade, the CIA)...
"Revanchist Bankers." Love it.
"We know now that Government by organized money is just as dangerous as Government by organized mob." --FDR
May 29, 2009 10:12 AM | Reply | Permalink
I'm usually in favor of reducing transaction costs. Brokerage fees have come down over the past generation. That's usually a good thing. And I have no reason to support high margins for bankers. But 0.1% spread strikes me as pretty low.
Transparency, if it means standardization so that a derivative doesn't amount to a 100 page contract, seems reasonable. But should we work hard to increase churning and liquidity (by decreasing transaction costs)? Is day-trading really what we want to optimize for?
Don't forget that trades involve risk, and trying to optimize risk matters is part of what created the problem today.
May 29, 2009 2:35 PM | Reply | Permalink