Senator Lincoln Proposed Segregating Derivatives Units of Commercial Banks

Bloomberg reports that Senate Agriculture Committee Chairman Blanche Lincoln is expected to table a proposal to require commercial banks to separate their derivatives operations from their commercial banking activities. The intent is to prevent banks from using cheap deposits to subsidize risky derivatives businesses, and thus eliminate the government backstopping of these activities. This “no bailout provision” would also forbid banks to use emergency banking facilities like the discount window and FDIC emergency liquidity guarantees for their derivatives activities.

Interview with Chris Whalen of Institutional Risk Analytics

From “Financial Economics, Deregulation and OTC Derivatives: Interview with Yves Smith of Naked Capitalism,” The Institutional Risk Analyst, February 22, 2010

“Wall Street once ran from a graveyard to a river. It now runs from an ocean to an ocean, and beyond. It has become, in Dr. Charles A. Beard’s measured words, a new Appian Way of the world. As the Street has changed, the men who rule it have changed, too. Giants of a new breed are in control today, as different from the Vanderbilts and Harrimans and Morgans of the past as the Street is different from the railroad right of way and the bankers’ byway it was formerly.”

Mystery Men of Wall Street, Earl Sparling, Blue Ribbon Books, NY (1930)

In this issue of The Institutional Risk Analyst, we feature a conversation with Yves Smith, the nom de plume of the creator of Naked Capitalism and one of the most savvy and respected members of the blogosphere. In professional life Yves is known as Susan Webber and is the founder of Aurora Advisors in New York. She is a graduate of Harvard College and a Baker Scholar and Loeb Fellow graduate of Harvard Business School.

Botox Cures – Part 1

Botox (botulinum toxin), a highly toxic neurotoxic protein produced by Clostridium Botulinum, is commonly used in cosmetic procedures. Botox is sometimes injected to improve a person’s appearance by removing facial lines and other signs of ageing. The effect is temporary and can have significant side effects.

The global economy is currently taking the “botox” cure. A flood of money from central banks and governments – “financial botox” – has temporarily covered up unresolved and deep-seated problems.

On Goldman’s (and Now Morgan Stanley’s) Deceptive Synthetic CDO Practices

Goldman is trying to diffuse the increasingly harsh light being turned on its dubious practices in the collateralized debt obligation market, with the wattage turned up considerably last week by a story in the New York Times that described how a synthetic CDO program called Abacus was the means by which Goldman famously went “net short” subprime. We’ve mentioned Abacus repeatedly because AIG wrote guarantees on at least some of the Abacus trades.

Interesting Paper on Leveraged Buyouts and Private Equity

Christmas is fast approaching and I thought that instead of writing up Alpha.Sources’ pendant to the flurry of 2010 market outlooks (it will come at some point over the Christmas), I would point you to a recent paper I read on leveraged buyouts and private equity industry. The paper is written by Steven N. Kaplan and Per Strömberg at the Institute for Financial Research in Stockholm and offers a nice overview of industry which has grown in importance since it was conceptualized in the roaring 1980s and spawned stories such as Wallstreet as well as it was of course an integral part of the story of Milken and the junk bond market‘s rapid ascend and subsequent fall from grace.   

The 7 Habits of Highly Suspicious Hedge Funds

You’ve heard this story before: A trader at a bank is knocking the cover off the ball. His success garners political power within the bank. He creates a fiefdom that insulates him from the rest of the firm; his trading group explodes in size. He lives a conspicuous, extravagant lifestyle. His ego alienates the management […]