Friday, September 24, 2010

A Timeline Worth Analyzing 22

The Great and Secret Show begins with a series of odd facts and trends that are assembled from letters at the Dead Letter Office of the postal service.  A pattern emerges from selected facts and conjectures.  Do you see a fundamental pattern emerging from these journalistic factoids over the last 38 years?

Derivatives Crisis TIMELINE

1972 Accounting standards in the U.S. are no longer generated by public accountants through the Accounting Principles Board but by the seven-member Financial Accounting Standards Board (FASB), including required members from industry, academe, and financial analysts in addition to members from public accountancy. Thus the politicization of accountant rules began in earnest.

1973 Fischer Black, Robert Merton and Myron Scholer develop a formula which sets a price on an option. This formula, adopted from a physics formula for transfer of heat in liquids, eventually wins a Nobel prize.

1973 Chicago Board Options Exchange opens

1982 James Simons starts Renaissance Technologies, commonly called “Rentec,” one of the first and most important hedge firms specializing in automated trading. Algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading includes a special class called “high frequency trading.See:

October 19, 1987 Stock market losses 22% of value in a single day

Late 1987 -- Plunge Protection Team formed

1988 Renaissance Technologies launches the Medallion Fund, which includes commodities futures, treasury bonds, currency swaps, and foreign bonds. Essentially swallowed Axcom Trading Advisors in 1992. This fund has become one of the very most successful speculative funds and charges high fees.

Fall 1993 Metallgesellschaft refining and Marketing US subsidiary closed after American subsidiary’s offer to oil companies of a fixed price for ten years collapses.

1994 Orange County California went broke over interest rate spread differential bets. The bankrupt county recovered $400 million of its losses from Merrill Lynch.

1995 Bankers Trust loses $200 million lawsuit over its derivatives.

February 1995 Barings Bank, Britain’s oldest merchant bank, goes broke because of $1 billion in unauthorized trading by Nick Leeson

mid-nineties: APL computer language came out of Harvard. This is a language of compact instructions, so dense that it is difficult to edit and very difficult to proof the language for programming errors. This language and its offshoots is typically used for the “iterations” on which derivatives contracts are initially valued.

April, 1998, Commodity Futures Trading Commission (CFTC) Chair Brooksley E. Born meets with Greenspan, Rubin and Levitt and loses the fight to have all derivatives conform to CFTC requirements

May 7, 1998, CFTC issues a “concept release” about derivatives and their risk

July 5, 1998 Salomon Brothers arbitrage unit announced as disbanding

August, 1998 Russia defaults on its loans

September, 1998, Long Term Capital Management fails

Late 1999 Gramm-Leach-Bliley Act is passed, dismantling the walls separating commercial banks, investment banks and insurance companies. The act did not provide for any SEC oversight of investment bank holding companies.

December 15, 2000, the Commodity Futures Modernization Act is passed (authored by Senate Banking Committee Chairman Phil Gramm [R-TX]). Details are at:

2004 SEC proposes a voluntary system of market regulation. The big investment banks opted to join but the holding companies would be permitted to follow their own computer models to assess how much risk they were taking. The SEC would get access to make sure the complex capital and risk-management models were up to the job.

2005 Renaissance Technologies launches the Renaissance Institutional Equities Fund for institutional investors.

2006 High frequency trading accounts for 60% of trades on the London Stock Exchange. The percentage of trades attributable to high frequency traders would increase in 2007 and 2008 for both the London and New York exchanges.

March 17, 2008 Bear Stearns (a large investment bank) acquired by JP Morgan Chase with FED guarantee

September 7, 2008 Fannie Mae and Freddie Mac placed in conservatorship by Federal Housing Finance Agency

September 14, 2008 Bank of America announced its intention to acquire Merrill Lynch (transaction finalized on December 5, 2008)

September 15, 2008 Lehman Brothers files for bankruptcy

September 16, 2008 A.I.G. is suddenly broke from a derivatives-based liquidity crisis. Fed loans AIG $85 billion.

Third week of September, 2008 – US stock market tanks

September 25, 2008 Washington Mutual seized by the Office of Thrift Supervision

September 26, 2008 SEC Chairman Christopher Cox shuts down the voluntary program. All five brokerages in the program had either filed for bankruptcy, been absorbed or converted into commercial banks.

September 28, 2008 SEC suspends the “mark to market” rule of a new pronouncement, FASB 157, although it has no authority to do so.

October 9, 2008 FED loans AIG another $37.8 billion

November 10, 2008 US Treasury announces it will purchase $40 billion in new AIG preferred stock (this is in addition to the two previously mentioned FED loans).

2009 High frequency trading accounts for 73% of all equity trading in the USA. James Simons, founder of Renaissance Technologies, retires.

May 6, 2010 a “flash crash” of extreme volatility occurs and is blamed on high frequency trading. Congress is still investigating as of September, 2010.

September 21, 2010 “Preliminary report” by the Securities and Exchange Commission and the Commodities Futures Trading Commision on the flash crash released – see

= = = = = summary = = = = =
It is my opinion [as of May, 2009] that the American economy will spiral into depression and will not recover until the items below in red are fixed:

-- Plunge Protection Team disbanded with SEC and FED prohibited by Federal law with criminal penalties from interfering with stock markets

--APL Computer language and its refinements are no longer in use

--Gramm-Leach-Bliley is repealed, and Glass-Steagall is reimposed

--The USA outlaws derivatives trading except for commodities traded by listed firms with reserves where the transactions occur openly on the CBOE. Separately, no federal agency or bureau is allowed to interfere with either the content or release of accounting rules, being independent, professional matters.

It is also my opinion that Congress will not enact these corrections until a full-blown depression is manifest.”*

*The financial reform act of 2010 is absolutely, hopelessly inadequate – worse than nothing.

[additional recommendation as of September, 2010:]

All tradeable financial instruments must be held for a period of no less than five business days.

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