
Larry Summers Withdraws from Fed Consideration [pdf] - kaa2102
http://online.wsj.com/public/resources/documents/summers.pdf
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ratsmack
This is probably good as we do not need someone that is overly connected with
the street, if you know what I mean.

~~~
mcantelon
Bigtime. Summers is a key proponent of the financial practices that led to the
2007 financial crisis.

>Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-
Steagall ... He then oversaw passage of the Commodity Futures Modernization
Act, which banned all regulation of derivatives

[http://chronicle.com/article/Larry-
Summersthe/124790/](http://chronicle.com/article/Larry-Summersthe/124790/)

~~~
effn
The vast majority of OTC derivatives was far less disruptive to the banking
sector than your average vanilla home mortgage loan during the crisis.

An overwhelming majority of all the banks that failed during the crisis had
zero OTC derivatives on their books, but plenty of average vanilla home
mortgage loans.

Internal documents from the banks that did deal in more sophisticated
financial products show that they had a good understanding of how these
products exposed them to risks in the home mortgage market, they just didn't
think that housing prices would fall that much.

Despite all this, people like to blame OTC derivatives for the crisis rather
than overconfidence in the housing market.

Why is this?

~~~
malandrew
Not really. OTC derivatives greatly contributed to what happened because it
_obscured who your counterparty was in a transaction_. This is really
important because as the world falls apart around you, you don't know if your
OTC derivatives happen to be based indirectly and at least in part on some
other failing financial institution. Multiply this by everyone you do business
with and you have a complete dissolution of trust and ability to properly
assess risk. Those institutions that failed and only had vanilla home mortgage
loans failed because they themselves were the ones responsible for the
irresponsible lending or because they got caught up by it at the end of the
unraveling that destroyed enormous amounts of value.

There is no way that the markets would have fallen that far and that fast if
most participants, and the rating agencies, had the capacity to accurately and
directly determine how much risk they and their counterparties had.

I imagine that the complicitness of the rating agencies in the whole thing
never would have even gotten so egregious if most institutions had vanilla
instruments on their books that were straight forward to value. OTC
derivatives made it very easy to hide finagling and create an environment
where rating agencies feel comfortable playing the tit-for-tat game with banks
because they thought no one would notice ethical transgressions among all the
indirection of derivatives.

~~~
yummyfajitas
_This is really important because as the world falls apart around you, you don
't know if your OTC derivatives happen to be based indirectly and at least in
part on some other failing financial institution._

This is simply incorrect. The cash flows involved in an OTC derivative are
explicitly stated in the contract itself.

 _I imagine that the complicitness of the rating agencies in the whole thing
never would have even gotten so egregious if most institutions had vanilla
instruments on their books that were straight forward to value. OTC
derivatives made it very easy to hide finagling..._

You imagine incorrectly. Pricing most of these contracts is 8'th grade math
given a specific scenario - fancy math comes into play only in estimating the
probabilities of each scenario. In principle, the pricing formula is this:

    
    
        price = P(housing goes down) x BIG LOSS + P(housing goes up) x MODERATE GAIN
    

That's the price, regardless of whether it's a straightforward vanilla
mortgage or a fancy synthetic CDO. The ratings agencies, banks and government
all assigned a very low value to P(housing goes down). Using vanilla
instruments doesn't change this basic calculation.

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jrn
I think opposition started with Scott Sumner in July.
[http://www.themoneyillusion.com/?p=22379](http://www.themoneyillusion.com/?p=22379)
Very good news. I expect to see the markets react tomorrow, ala balmer on a
much greater scale.

~~~
pcurve
and opposite side. The market will tank tomorrow by 1.5-2%.

~~~
steveplace
equity futures are already up 1% during sunday's trade

[http://finviz.com/futures_charts.ashx?t=ES](http://finviz.com/futures_charts.ashx?t=ES)

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Agustus
The campaigning for federal reserve chairman has been unprecedented. President
Obama I am sure promised Summers the position for some of the water he and
Christina Romer carried; however, since President Obama signaled Bernanke's
position will not be renewed, the sharks started to circle and we have the
current situation.

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spikels
This was a political decision. Larry Summers is one of the sharpest and most
productive economists around and would have been as qualified as any Fed
Chairmen in history. However he has tended to speak his mind too freely for a
job requiring the approval of our timid politicians. I'm sure they will find
someone almost as good to fill the spot and he will be fine making millions on
Wall St rather than helping formulate our monetary policy.

~~~
mathattack
It's a political decision, but sometimes this is how the political process
works best. For better or worse our political process pushes towards extreme
edges during the primaries as candidates have to play to the base. Getting
appointed officials through congressional approval forces the people actually
doing the work to be closer to the center of the country's political thought.

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jessaustin
Prof. Harry Lewis has long been an attentive critic of Summers, paying
particular attention to his roles in hushing up Harvard's corruption in
Russia: [http://harry-lewis.blogspot.com/2013/09/larry-summers-and-
et...](http://harry-lewis.blogspot.com/2013/09/larry-summers-and-ethical-
compromise.html) and in some really terrible investments: [http://harry-
lewis.blogspot.com/2013/08/end-of-summers-updat...](http://harry-
lewis.blogspot.com/2013/08/end-of-summers-updates.html)

Both his apparent tolerance of corrupt self-dealing and his reckless
investment philosophy should have disqualified Summers from ever holding any
top governmental financial office, but I guess we should count ourselves
fortunate that his intemperate sexist commentary, or _something_ anyway, has
disqualified him from holding any more top offices.

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ethana
Janet Yellen might as well the the first woman Fed chairman. We have first-
woman for pretty much everything else already, so this will be good. Next up,
Hilary for President ;)

