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What the Fed Could Have Done Differently
Ernest (Ernie) T. Patrikis is a partner White and Case. During his 30-year career at the Federal Reserve Bank of New York, Mr. Patrikis served as General Counsel for many years and later acted as Chief Operating Officer in his role as First Vice President. He also served as Deputy General Counsel and an alternate member of the Federal Open Market Committee, a staff member of the President's Working Group on Financial Markets that was created in the aftermath of the 1987 financial markets crisis, a member of the Committee on Payments and Settlement Systems of the G-10 central bank governors, legal advisor to the Basel Committee on Banking Supervision, and one of the principal drafters of the US International Banking Act of 1978. Mr. Patrikis began his eight years with AIG as Special Advisor to the Chairman in 1998 and became General Counsel and Senior Vice President in 1999. As General Counsel, he directed one of the largest corporate law departments in the world, managing all of AIG's corporate, litigation, governance, regulatory, compliance and enforcement matters.
Question: What could the Fed have done differently in 2007 to mitigate the severity of the crisis? (Steven Landsburg, The Big Questions)
Ernest Patrikis: I don’t know if it was 2007, or earlier when there was good luck in the marketplace. I remember there was an early intervention by the European Central Bank putting liquidity into the market. It was massive. And the Fed followed and put in less liquidity. And I said to myself, gosh, look at those guys in Frankfurt and all, they’re trying to look like heroes taking this major action. And the Fed was just following to show that they were there. And I looked back at that one and I say to myself, I was absolutely wrong in terms of my judgment about it. That the ECB had it right, and more liquidity should have been provided to the market earlier on. Again, not a cure all, but perhaps could have tempered the impact on the market somewhat.
Question: Was less control for CDS’s a general system wide problem, or was it only for AIG counterparties? (Jeffrey Friedman, Causes of the Crisis)
Ernest Patrikis: No, I think the question, I guess, for the counterparties at AIG, and this is a major issue, and not just swaps, but in the wholesale market and that is, to what extent do participants in their market know the current financial position of their counterparties? I think the answer is, people don’t ask. They just deal with each other. This has been a question for 20 years. Why should I do the trade with you, what’s your financial condition today, and then one answer is, well, if it’s an institution that trades a lot, it can be completely different tomorrow in terms of the financial condition.
The credit default swap as an instrument has been unfairly attacked. Now, I have my prejudice. I was on the board of ISDA, the Swaps Trade Association for a number of years, but I think the product worked well, it continues to be a product that gives us price on securities, and it’s a good indication of price on securities. Outside of AIG it’s worked well. In Lehman, there used to be issues on documentation and I credit Tim Geitner in terms of toughing up as should have been done long ago on the need for firms to tighten up and get their documentation complete.
And someone was telling me of the number of trades, that Lehman has a huge number of trades. Only one resulted in litigation regarding the validity of the trade because of documentation. So, I think the swap worked well. That’s not to say that there’s not a need for standardized swaps to be dealt with on trading platforms and settlement mechanisms, for regulators. For example, the Basil II perhaps in dealing with the trading book as opposed to the credit book perhaps didn’t have a high enough capital charge. It’s not to say that everything was perfect, but I think the credit defaults were up was deemed to be the evil instrument because of AIG.
At AIG it was an issue of risk management. And I put these two and say the two key words for the next several years in terms of banking supervision are quality of risk management, and quality of liquidity management.
Question: Was the main counterparty to AIG Goldman Sachs?
Ernest Patrikis: I don’t know. I read the papers and say, yes, Goldman Sachs was a major counterparty and there were many stories in the market about debates between Goldman Sachs and AIG on valuations and things like that, that were a bit strange. So, when someone writes the book maybe they will be able to give us more insight as to really what was going on there.
Question: Goldman Sachs has claimed the $14 billion they received from AIG’s rescue was immaterial for their bottom line. Do you believe this to be true? (Russ Roberts, Café Hayek)
Ernest Patrikis: Well, I mean, if they were getting collateral from AIG it was good quality collateral. What were they doing with it? They were probably re-pledging it. Hopefully, they were re-pledging it with collateral and were seeking back something that was liquid so that they would have the opportunity if they needed to pay it back as rates changed, market rates change. So, to me, we’re talking about collateral. It is an issue of where is my collateral, with the counterparty, that will be focused on by examiners. The rate I’m charged on my swap will depend in part if I have to put up collateral, whether I let my counterparty re-hypothecate the collateral to another party. Will people become nervous?
I had one instance where there was a client who was posting collateral with a bank and the central bank of that country guaranteed all deposits. So, the client said to the counterpart branch in a foreign bank here in New York, “I want to place that collateral with the bank in the foreign country where it’s 100% guaranteed” So, in a nervous world we’ll see things like that happen.
Recorded on November 9, 2009
Ernie Patrikis, former AIG head council, argues that credit default swaps have been unfairly attacked.
- Modern antibiotics can effectively treat bubonic plague, which spreads mainly by fleas.
Bacteria under microscope
needpix.com<p>Today, bubonic plague can be treated effectively with antibiotics.</p><p style="margin-left: 20px;">"Unlike in the 14th century, we now have an understanding of how this disease is transmitted," Dr. Shanthi Kappagoda, an infectious disease physician at Stanford Health Care, told <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">Healthline</a>. "We know how to prevent it — avoid handling sick or dead animals in areas where there is transmission. We are also able to treat patients who are infected with effective antibiotics, and can give antibiotics to people who may have been exposed to the bacteria [and] prevent them [from] getting sick."</p>
This plague patient is displaying a swollen, ruptured inguinal lymph node, or buboe.
Centers for Disease Control and Prevention<p>Still, hundreds of people develop bubonic plague every year. In the U.S., a handful of cases occur annually, particularly in New Mexico, Arizona and Colorado, <a href="https://www.cdc.gov/plague/faq/index.html" target="_blank">where habitats allow the bacteria to spread more easily among wild rodent populations</a>. But these cases are very rare, mainly because you need to be in close contact with rodents in order to get infected. And though plague can spread from human to human, this <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">only occurs with pneumonic plague</a>, and transmission is also rare.</p>
A new swine flu in China<p>Last week, researchers in China also reported another public health concern: a new virus that has "all the essential hallmarks" of a pandemic virus.<br></p><p>In a paper published in the <a href="https://www.pnas.org/content/early/2020/06/23/1921186117" target="_blank">Proceedings of the National Academy of Sciences</a>, researchers say the virus was discovered in pigs in China, and it descended from the H1N1 virus, commonly called "swine flu." That virus was able to transmit from human to human, and it killed an estimated 151,700 to 575,400 people worldwide from 2009 to 2010, according to the Centers for Disease Control and Prevention.</p>There's no evidence showing that the new virus can spread from person to person. But the researchers did find that 10 percent of swine workers had been infected by the virus, called G4 reassortant EA H1N1. This level of infectivity raises concerns, because it "greatly enhances the opportunity for virus adaptation in humans and raises concerns for the possible generation of pandemic viruses," the researchers wrote.
The word "learning" opens up space for more people, places, and ideas.
The coronavirus pandemic has brought out the perception of selfishness among many.
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