Financial Innovations

I went to a session today on financial innovation. The panelists were:

• Michael Milken, Chairman, Milken Institute; Chairman, FasterCures / The Center for Accelerating Medical Solutions
• Lewis Ranieri, Prime Originator and Founder, Hyperion Private Equity Funds; Chairman, CEO and President, Ranieri & Co. Inc.
• Richard Sandor, Chairman and CEO, Chicago Climate Exchange; Senior Fellow, Milken Institute
• Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management
• Moderator: Andrew Rosenfield, Managing Partner, Guggenheim Partners LLC; Chairman, Guggenheim Investment Advisors

These are some of the architects of the mortgage backed securities and other innovative financial instruments.

The people on stage still very much believe in financial innovation. They see financial innovation as a means of solving the world's major problems, e.g. making it possible to trade property rights for water and air, as a way to save endangered species, as a way of lifting the poor out of poverty, as a solution (rather than a cause) of the problems we are having today in mortgage markets. It is very much in their own financial interests to believe these things, and these are people who know how to sell an idea or product or they wouldn't be where they are, and it was clear from a variety of sessions they were there - in part - to argue against regulation that would inhibit their ability to create new financial instruments. So all of their comments should be taken in that light. They have convinced themselves that they hold the keys to the drivers of world growth and the solutions to the world's problems, and they do not want anything standing in their way. In fact, one of their biggest regrets from the crisis is that other countries will no longer hold our financial system in such high esteem and will shy away from financial innovation that could be very helpful to their development (and the panelist's pocketbooks). Their creations are now viewed as imperfect, and that seemed to bother them.

In their defense of financial innovation, they said something I've said too, so I have some sympathy for the argument. They said that it wasn't the financial vehicles themselves that were the problem, it was the way that they were used, and the way that warnings of impending trouble were ignored. And the biggest problem in the way they were used was to give people free (zero price) options. People could purchase a house with zero money down, realize the gains if the price goes up, and since the loans are non-recourse, walk away relatively unscathed if the price turns downward. Giving people free options was the problem, it wasn't the financial instruments themselves (in fact, they thought that since they distributed the losses all over the world, the new financial instruments probably saved US banks who could not have absorbed the losses on their own).

Another problem that was cited was bond agencies, though Milken argued that any investor ought to do their own rating and not trust anyone else (to which Scholes replied why should we duplicate the same effort thousands of times - wouldn't it be better if the market could do this for us and save the duplicated effort?), so his was another area they cited as needing attention. But notice that, once again, it's not the financial instruments, it's the lousy ratings agencies.

What is their solution to our financial market problems? They say, unsurprisingly, that this is not something the government needs to solve, or can solve, the government needs to get out of the way and let the private sector solve the problem. I'm supportive of the idea that we should be careful about getting in the way of financial innovation, but I don't think the solution is for the government to get out of the way, there are market failures (e.g. moral hazard from lack of capital requirements) that will not correct themselves.

But you should watch it yourself - click on the link "Financial Innovations: Complexity Isn't Innovation, Leverage Isn't Credit" in the list below the video player (starts at 3:45 min):

Comments

[anon]

Increasing complexity by definition introduces risks that haven’t yet been “captured” in historical statistics. This approach to risk is an iterative learning process, where learning can only occur through new experience. The non-statistical top-up to this process is acute common sense, which is rare. Unfortunately, increasing complexity also makes it likelier that markets rather than governments must resolve the full risk experience. The aspect of free options is a relatively trivial detail within this evolving analysis, as that is the essential nature of all mispriced risk.

[dd]

"...the government needs to get out of the way and let the private sector solve the problem."

Does that include the GSEs, FHLB and the Fed?

[Austin Kelly]

Did the panelists act like the problem with giving free options to borrowers was a surprise? It's an obvious theoretical result, and the problem was known empirically since at least 2005.

See GAO's report on zero down mortgages

http://www.gao.gov/new.items/d0624.pdf

or my 2006 paper that expanded GAO's work

http://ideas.repec.org/p/pra/mprapa/4318.html

The idea that mortgages with no down payment are expensive couldn't possibly have come as a surprise to the people who were making them or investing in them in 2006/2007.

[Enginerd]

"Finanical Innovation" itself is not all bad, just like you can't say physics is bad because it gave us the atom bomb. But any time a new instrument is developed, the way people are going to use it should be anticipated. Because banks could spread risk, they didn't worry as much about what would happen if things went wrong. That's bad. Spreading risk means that any individual does better, unless the entire group gets screwed, which is what we're seeing now.

People are going to use any financial innovation any way they can to try and make a profit. That needs to be anticipated, and instruments should be designed accordingly to prevent abuse. You can't install wiring without insulation and then say to people "be careful not to touch this, and if you do, anything bad that happens is your fault". Build a system which is robust, TRANSPARENT, and punishes abuse quickly. That's a good financial innovation.

[ken melvin]

Stop me before I kill again. What's the net?

[robertdfeinman]

As far as I can see there was only one financial "innovation". This was to devise a mechanism whereby those who don't traditionally put money in banks would do so. The net effect of this was to increase the amount of money that banks could lend out. This had two results: banks would increase the number of loans they could offer (since they were not restricted by capital) and they would lower their standards (since supply was greater than demand).

In order to attract this money into the banking sector yields to investors had to be higher than what depositing in banks directly would yield. If a corporate bond, say, yields 6% while a bank is paying 4% then investors know that the difference reflects increased risk. So when "innovative" instruments were created that yielded more than what banks were offering directly there had to be a reason.

There are many explanations for why the obvious reason was ignored: banks wanted the new capital, middlemen wanted their cut for creating and marketing these intermediate securities, and ancillary firms (appraisers, mortgage brokers, rating agencies, etc.) all liked the extra business. Some people caught up in this "innovation" may have been deluded, some may have been uneducated, some may have been dishonest and some may have just be plain greedy, but it is impossible to believe that all of them didn't understand what was going on.

How could this have been avoided and what can be done in the future?

Is there a way for banks to make more loans? Apparently not, that's why pseudo-banks arose which were unconstrained by normal regulations. Countrywide knew what it was doing and so should have those lending it money. Increased regulation or oversight could make it clear to people investing in such firms what the risks are.

Whether these sorts of practices should be banned altogether is a philosophical question, not an economic one. Should people be prohibited from buying lottery tickets since they are such a poor investment? For hundred's of years the answer was yes. Now the answer is no, is one way better than the other?

So future regulation is also a philosophical issue. Should people be prevented from doing stupid things, especially when they don't fully understand what they are getting into? We have seen that disclosure requirements on loan applications don't work, so the pure libertarian argument that people are responsible for their own behavior breaks down in the real world.

When the smoke clears it will be interesting to see whether any real home buyers who couldn't qualify for a traditional mortgage were helped by these "innovations" and whether any but a small subset of investors came out ahead from dealing in these "innovations". After all there always is one winner in musical chairs, but is that the best way to run a society?

[Alex Tolley]

Obviously if you are a financial person, your hammer is new financial tools. Lawyers and legislators would want new new laws.

It's a bit rich arguing against giving zero cost options - that is exactly what hedge fund managers give themselves - salary + 20% of profits in up years, no givebacks in down years. As for pricing bonds themselves, wasn't the manipulation of junk bonds one of the reasons Milken was jailed and banned from the securities industry for life? These "Masters of the Universe" are wearing no clothes.

[Winslow R.]

Everybody sees government intervention in the economy as distorting the market just because it is 'public'. This is how it should be!

No one (in the mainstream) sees bank intervention in the economy as distorting the market because it is a quasi-private institution, yet this is exactly what is happening but should not be happening.

Just as tax farming can distort the ecosystem, so can interest farming through financial innovations gone awry.

When Bear Stearns decides to use financial innovation to make huge loans to hedge funds which result in a financial industry bail out there are fundamental and even permanent distortions in the long term growth path of our economy.

Is there a better way to achieve optimal growth than through financial innovation? All the issues Milken suggests addressing, should be addressed in the political sphere. In order for those issues to be resolved, we need to remove the financial incentive to solve political problems through monetary policy.

Monetary policy and financial innovation should be very boring. Purely nuts and bolts with no bias hence no distortion to the 'real' economy. If Milken wants to lower poverty, give every citizen equal access to the lender of last resort.

[Winslow R.]

rdf wrote: "As far as I can see there was only one financial "innovation". This was to devise a mechanism whereby those who don't traditionally put money in banks would do so. The net effect of this was to increase the amount of money that banks could lend out. This had two results: banks would increase the number of loans they could offer (since they were not restricted by capital) and they would lower their standards (since supply was greater than demand)."

Bank loans are not 'savings' constrained. Banks can borrow funding from the Fed up to their capital ratio's and even then the limit exists only if it is enforced.

rdf wrote: "In order to attract this money into the banking sector yields to investors had to be higher than what depositing in banks directly would yield. If a corporate bond, say, yields 6% while a bank is paying 4% then investors know that the difference reflects increased risk. So when "innovative" instruments were created that yielded more than what banks were offering directly there had to be a reason."

The money was attracted into the nonbank sector - corporate bonds are not fdic insured.

Countrywide owned a bank.

Again the problem is the ability of financial entities, especially those directly tied to banks, to over leverage and put all lenders at risk.

[Winslow R.]

I'm still trying to figure out why Milken invited Mark. Keep your friends close and your enemies closer? How come Brad D. didn't go?

[HankP]

"Son, I see that you've crashed the car again and that you ran up the emergency credit card I gave you."

"That's true, Dad, but the family needs a car so you'll have to buy a new one. As to the credit card, it's in your name and you don't want a bad credit rating, so you need to pay that off too."

"Son, what guarantees do I have that you won't crash the car and run up the credit card again"

"Dad, it's totally unfair of you to restrict my freedom and to cut back on my credit. It's un-American and sounds like Communism. Remember how much money I made gambling with those cash withdrawals last year?"

"But Son, I never saw any of that money that you made from gambling."

"Of course not, I was the one who earned that money. I took the risks and I should get the reward."

[Jas Jain]

--
At an awards ceremony dinner in 1998 I spoke to one David Katz, then President of an association of Finance Executives in SoCal, and he said that finance does not lend itself to innovation, a conclusion that I shared. It is mostly to cover up the risk and make it more opaque so that Crooks can peddle the products to people, including pension funds, via respectable organizations.

American econo-political system is...

A system of the Crooks, by the Crooks, and for the Crooks! No wonder that a Crook was hosting the conference!!

Debt Pushers are evildoers and most of the evildoers in the world reside in the US.

Jas

[The Baron]

Winslow R., and the panelists, have it (mostly) right, it isn't the financial innovations that are really the problem, or even their complexity. The higher rate of return made it obvious to anyone investing that these had a higher risk, but because the risk was highly distributed, loans could be made to individuals that otherwise could never have gotten a loan. The industry was providing a very needed and good service to a very under served market. The big problem was the massive leveraging of these higher risk elements. If you want to over leverage something to increase your profits, common sense says to leverage safe bets. But the pigmen got greedy and wanted to leverage the high yielding stuff, forgetting that high yields equate to high risk. Instead of leveraging 10% loans into 25% profit vehicles, they should have been leveraging the rock solid 5%'ers up to match the 10%. Well, maybe I'll take that back, leveraging is almost always bad in financial instruments.

[xyz]

Milken really wasn't that bad. Not to say he didn't do anything wrong, he just got nailed for doing relatively minor things compared to what EVERYBODY on Wall Street and in the City were doing at the time.

Without looking at a reference, can anyone here actually name a single charge that he was convicted on? I highly doubt it. It seems that most of the jabs thrown his way are based on the nebulous received wisdom of "Milken as bogeyman" that has been passed down from dubious sources and repeated ever since.

Think about it: his main detractors were Rudy Guiliani and BEN STEIN. If anyone feels like throwing some off-the-cuff insults at Milken, think about the company you are keeping, and if you actually know ANYTHING about the man except for Ben Stein-originated sound bytes.

[dd]

Can't wait for 20 years to pass so Ken Lay can be a saint too.

[ampersand]

“Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design. . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” —John Kenneth Galbraith,

As Galbraith aptly pointed out, most of financial innovation is simply rediscovering leverage.

http://www.theatlantic.com/issues/87jan/parallel.htm

..Ever since the Compagnie d'Occident of John Law (which was formed to search for the highly exiguous gold deposits of Louisiana); since the wonderful exfoliation of enterprises of the South Sea Bubble; since the outbreak of investment enthusiasm in Britain in the 1820s (a company "to drain the Red Sea with a view to recovering the treasure abandoned by the Egyptians after the crossing of the Jews"); and on down to the 1929 investment trusts, the offshore funds and Bernard Cornfeld, and yet on to Penn Square and the Latin American loans -- nothing has been more remarkable than the susceptibility of the investing public to financial illusion and the like-mindedness of the most reputable of bankers, investment bankers, brokers, and free-lance financial geniuses. Nor is the reason far to seek. Nothing so gives the illusion of intelligence as personal association with large sums of money.

It is, alas, an illusion. The mergers, acquisitions, takeovers, leveraged buy- outs, their presumed contribution to economic success and market values, and the burden of debt that they incur are the current form of that illusion. They will one day -- again, no one can say when -- be so recognized. A fall in earnings will render the debt burden insupportable...

From the mergers, acquisitions, and buy-backs, it is now reasonably well agreed, comes no increase at all in industrial competence. The young men who serve in the great investment houses render no service to investment decisions, product innovation, production, automation, or labor relations in the companies whose securities they shuffle. They have no real concern with such matters. They do float some issues for new ventures or expanded operations; one concedes this while noting again how dismal is the present showing on real capital investment. Mostly their operations absorb savings into an inherently sterile activity.

History may not repeat itself, but some of its lessons are inescapable. One is that in the world of high and confident finance little is ever really new. The controlling fact is not the tendency to brilliant invention; the controlling fact is the shortness of the public memory, especially when it contends with a euphoric desire to forget.
....

But to the new high priests of the Chicago School, and all the neo-liberal pretenders, thoughts like those are so passe.

[Bruce Wilder]

"the new financial instruments probably saved US banks who could not have absorbed the losses on their own"

I've been following this pretty closely, and it is not clear to me that U.S. banks have been saved. They do not seem to have off-loaded as much risk as they thought. And, if you create a huge loss, how does it help that you distributed that loss far and wide?

xyz: "Milken really wasn't that bad. Not to say he didn't do anything wrong, he just got nailed for doing relatively minor things compared to what EVERYBODY on Wall Street and in the City were doing at the time."

Please. The man stole $500 million. It would take a week just to explain how, but complexity and arcaneness do not change the fact, nor should they excuse him.

These guys are laboring to make financial markets into a Casino, where they are the House. Every move is aimed at extracting a few more pennies from the fools playing the nickel slots, or move the masses to the quarter slots.

The business end is a shakedown of the American people: take those wage earners, whose wages are not increasing, because capital investment is going elsewhere, and load them up with debt, so that more and more can be extracted: everything from expensive health care, more expensive college education to payday loans and the Adjustable Rate Mortgage. And, their big complaint? That non-recourse mortgages prevented their loading even more risk on to the peons!

[Jas Jain]

"But to the new high priests of the Chicago School, and all the neo-liberal pretenders..."

Most of the economic thoughts, or schools, are funded by Crooks to justify their crookery in the name of some or other principle that is supposed to be good. The Propaganda Machine that rules over working Americans heavily employs economics profession. Economists are like priests of the system and they are corrupt priests.

Jas

[Jas Jain]

--
Crooks like Milken are celebrities in a culture of Debt Pushers who actually control the economic and political system in the US. Look at the agents of these Crooks like Dodd, Frank, Schumer, Sheila Blair (FDIC), and many others.

There is nothing that Americans can do to rid themselves of the Crooks via the voting profess because Crooks control who can be voted for. Clinton, McCain and Obama are all agents of the banking and finance Crooks.

Jas

[ampersand]

And, if you create a huge loss, how does it help that you distributed that loss far and wide?

Well, did you know that you are buying this risky stuff? You 401K and mutual fund investments are doing it for you. Even as an individual stockholder, you are doing it. The company whose stock you buy - because of the way their treasury is managing cash - is buying this stuff for you.

There is no escape. You are forced to to take part in this casino game.

And you know why - it is exactly as you said ..

These guys are laboring to make financial markets into a Casino, where they are the House. Every move is aimed at extracting a few more pennies from the fools playing the nickel slots, or move the masses to the quarter slots

The Chicago boys say - casinoes create wealth! More gambling. Peasants like you work, so that you can give their patrons their cut of your sweat.

Want to sit this casino out in maybe Treasuries. No way, you peasant. we'll devalue your money amd still steal from you. So better play the game.

Their capos - the Fed, SEC, FASB, OTC, FDIC, .. all are there to ensure that you play and deliver their cut, or sleep with the fish.

[Jas Jain]

--
Bruce Wilder:
"These guys are laboring to make financial markets into a Casino, where they are the House. Every move is aimed at extracting a few more pennies from the fools playing the nickel slots, or move the masses to the quarter slots.

"The business end is a shakedown of the American people: take those wage earners, whose wages are not increasing, because capital investment is going elsewhere, and load them up with debt, so that more and more can be extracted: everything from expensive health care, more expensive college education to payday loans and the Adjustable Rate Mortgage. And, their big complaint? That non-recourse mortgages prevented their loading even more risk on to the peons!"

Thanks.

I have been saying this for at least 5 years, but using different language to reflect my disgust at Crooks that have turned most Americans into economic slaves. Debt slavery in the US and the UK is historically at the highest levels.

Only born-and-bred American dopes believe that they are free. Brainwashing has turned them into nothing more than farm animals (Crooks playing the role of farm owners). American economy, an Animal Farm?

Jas

[Jas Jain]

--
ampersand, I agree with your comments above.

I don't believe that there is any solution to the problem because Crooks have TOTAL CONTROL of the econo-political system, evidenced by the recent events and actions by the USG and the Fed, and Americans are BRED to be total dopes, i.e., brainwashed from birth, whereby they can't challenge the rule of the Crooks that rule behind the scenes. Propaganda Machine, controlled by the Crooks, is all powerful. Crooks hire some of the best economists and other propagandists that money can buy!

A partial and short list of rouge economists (engaged in propaganda):

Conference Board
ECRI
UCLA Anderson Business Forecast

Jas

[Lafayette]

Article: They see financial innovation as a means of solving the world's major problems, ...., as a way to save endangered species, as a way of lifting the poor out of poverty

Right. Have them pull up in a black limo and sing that song in unreconstructed New Orleans nowadays. They'd better bring their Nikes.

(Mark, you went to conference run by Mike Milken ... what did you expect? Apparently, an eye opener. These guys live on another planet, called Mammon. They think everyone wants to be like them, because they are the super-rich.)

Recommended reading: The Bonfire of the Vanities: A Novel by Tom Wolfe, $10 at amazon.com

[donna]

These are the people that make others believe there must be a hell, just so they can justify not taking them out....

[Eric Dewey, Portland OR]

Prof Thoma, thanks for another great post. Interesting stuff from interesting people (two of whom have some level of responsibility for some pretty big financial blowups of recent times).

As a non-economist, it's also fascinating to read the comments of those who profess economic training (and some who don't).

What's really interesting to me is bringing up John Law, and the discussions of whether or not financial innovation adds to wealth.

Because the question I keep coming back to is, what is wealth? There's this almost universal tendency to equate wealth with money; and even economists tend to equate wealth with "financial resources".

As a non-economist, I may be missing something, but I don't think money equals wealth - I think that the only true measure of wealth is the production of useful goods that promote and improve human existence. Money (and financial resources) is merely a means of exchanging one useful good (or service) with another.

The problem with John Law's scheme, and the South Seas bubble, and the Tulipmania, and the Dot.com bubble was that none of them produced anything that promoted human existence. Is the same true of the most recent problems? I'm not entirely sure.

Isn't the real question "Does financial innovation add to productivity?". Some does - leverage used in prudent amounts does have a multiplier effect on productivity.

The lesson that has yet to be learned (or quantified, at least at the macro level), is how to determine the level at which leverage becomes destructive rather than productive - i.e. the point of diminishing returns on leverage.

As individuals on the micro, we set that point for ourselves all the time, and some of us do better than others - and it's relatively uncontroversial to let some individuals fail.

The problem seems to come when there's a relatively large social entity (i.e. corporation or government) that is striving towards a politically charged goal, and where being perceived as failing to move forward toward the goal carries a high risk of loss.

Inside that social framework, it's pretty easy to allow yourself to believe that a zero-incentive situation will lead to the ultimate success.

And it seems to me pretty unlikely that classical econometrics will ever be able to resolve that conundrum.

[Lafayette]

enginerd: Because banks could spread risk, they didn't worry as much about what would happen if things went wrong.

Commercial Banks are NOT in the risk business. Investment Banks are.

Read about why the Glass-Steagal Act was passed, subsequent to the stock market crash in 1929. It made sense until it was relaxed (by the Gramm-Leach-Bliley Act in 1999). And, now, we are paying the consequences. We can thank Robert (Rubin) and Bill (Clinton), two "poh-boys".

There are good, tangible reasons why a firewall should be erected between the two business models (commercial and investment banking). The sub-prime mess is just one of them. The fact that our Golden Boy Financial Engineers could very well make it happen again should be another to consider.

[Cynthia]

Hey, I'm all in favor of launching financial derivatives as weapons of mass destruction, just so long as they're specifically designed to seek and destroy shadow banks -- keeping collateral damage to a bear minimum!

[TigerPaw]

I think if Al Capone were alive today he'd be holding seminars and people would attend to hear his pearls of wisdom too.

There seems to be no concept of shame anymore. Do six months or whatever it was that Milken got and then go on the party/lecture circuit and everything is forgotten down the memory hole.

And people wonder why the world today is in a mess.

[ken melvin]

Wiki:

On April 24, 1990, Milken pled guilty to six securities and reporting felonies in 1990:[1]

1. Conspiring with Boesky to trade on inside information.
2. Aiding and abetting the filing of a false tax return. The charge relates to Boesky’s false 13d statement.
3. Using Boesky to conceal the true ownership of MCA stock, hiding the fact that Milken's client Golden Nugget Companies was selling MCA.
4. Aiding and abetting Boesky in filing false SEC statements in their illegal scheme to help a client take over the Fischbach Corporation.
5. Committing mail fraud in his scheme to defraud the investors of the Finsbury Fund, a junk-bond mutual fund. Milken and an associate inflated the prices that Finsbury paid for junk bonds to increase his commissions.
6. Aiding and abetting the evasion of regulatory capital requirements.

As part of his plea, Milken agreed to pay $200 million in fines. At the same time, he agreed to a settlement with the SEC in which he disgorged $400 million, to be paid to shareholders who had been hurt by his actions. He also accepted a lifetime ban from any involvement in the securities industry.

At the behest of Attorney General Dick Thornburgh, Giuliani threatened to indict Milken's brother, Lowell (a lawyer for Drexel) for racketeering when Milken initially balked at pleading guilty. As part of the deal, the case against Lowell was dropped. Federal investigators also questioned some of Milken's relatives--including his aging father--about their investments.[2] There may have been a basis for investigating Lowell because of his employment with Drexel and the fact Milken often traded funds into his family's accounts. Nonetheless, this and other tactics employed by the government in the course of the investigation were the cause of much criticism.

The case would have been difficult to explain to a jury despite what appeared to be strong direct and circumstantial evidence. Nonetheless, many experts believed that Milken had little chance of acquittal. Some felt a potential jury would have had trouble relating to a man who earned more in one hour than most of them earned in one year.[3] Also, it was felt that a jury would have trouble believing that anyone could earn the money Milken earned and do so legally.[2]

At Milken's sentencing, Judge Kimba Wood told him:

You were willing to commit only crimes that were unlikely to be detected.... When a man of your power in the financial world... repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself... a significant prison term is required.

Wood recommended a 10-year prison sentence, of which, in her opinion, Milken should have served at least 36 to 40 months. However, Milken hired Alan Dershowitz to help reduce his sentence. Milken served only about 22 months (from March 1991 until January 1993) before being released. Wood was picked by President Bill Clinton to be attorney general in what some called a reward for reducing Milken's sentence. She was forced to withdraw because she had hired an illegal alien as her nanny.

Upon his release, he still had net worth of over $1 billion, despite having paid a total of $200 million in fines and settlements,[1] relating primarily to civil lawsuits. As of 2007, Milken is worth about $2.1 billion and has long since entered other business ventures. Most of his wealth comes from his success as a bond trader; according to Highly Confident by Jesse Kornbluth, he only had three losing months in 17 years of trading. The penalty only covered a few years of trading where the government had evidence of insider trading from Boesky, so other years of earnings were untouched.

In 1998, without admitting any guilt, he returned $47 million in fees to settle an SEC charge related to the 1990 order barring him from the securities industry. He allegedly breached the order when he advised MCI/News Corporation in a transaction in 1995, for which he received $27 million in advisory fees, and when he advised Revlon chairman Ronald Perelman on a Revlon/New World Communications deal in 1996, with $15 million in fees to Milken. In 1996, he received $50 million when Time Warner acquired Turner Broadcasting. The SEC did not bring up the last deal in the charge.

[dd]

There must be a differentiation between "market failures" and confidence schemes otherwise as now the "winners" will extort from the "losers" using a pseudo MAD rationale. The inventions of the last 20 years are variations on gambling aka well documented insurance schemes without reserves reinvented as "risk/reward" or "hedging." Love that hilarity. Milken understood the gig and was the "pioneer" but really the bait. Mike gets his conference; they get billions. It's gotta hurt and the only comfort is Boesky got worse. But man, the Winnick thing has gotta bite. "Market failures" are very profitable endeavors.

[dd]

More innovation this morning as the Fed expands TAF to take ABS. There must be big trouble in credit card and auto leasing/financing land otherwise why expand the collateral?
http://www.federalreserve.gov/newsevents/press/monetary/20080502a.htm

[Lafayette]

dd: More innovation this morning as the Fed expands TAF to take ABS.

Please use plain English. We do not all understand your acronymic parlance.