My antennae are up as I perceive a greater and greater concentration of power in fewer and fewer hands - check out http://www.bloomberg.com/apps/news?pid=20601109&sid=agFM_w6e2i00 :

"....The five biggest derivatives dealers in the U.S. -- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter, according to a report by the Office of the Comptroller of the Currency. More than 90 percent of those derivatives were traded over the counter, the OCC data show.

In the first six months of 2009, those five banks made $35 billion from trading in both derivatives, including interest- rate and credit-default swaps, and cash instruments such as Treasuries and corporate bonds, according to company reports collected by the Federal Reserve.

About half of JPMorgan’s $31.2 billion in trading revenue from 2006 to 2008 probably came from derivatives,....

The Obama proposals don’t go as far as some people have urged. Hedge fund billionaire George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger are among investors who have called for limits on the use of credit-default swaps. Soros wrote in a March 24 Wall Street Journal column that regulators should ban so-called naked swaps, in which the buyer isn’t protecting an existing investment.

Two days later Treasury Secretary Timothy Geithner dismissed such an idea before the House Financial Services Committee, telling members that 'my own sense is that banning naked swaps is not necessary and wouldn’t help fundamentally.'

Janet Tavakoli, founder and president of Tavakoli Structured Finance Inc. in Chicago, said in an interview that derivatives have allowed banks to camouflage risk.

'There has been massive widespread abuse of over-the- counter derivatives, which have contributed to transactions that people knew or should have known were overrated and overpriced at the time they came to market,' said Tavakoli, who traded, structured and sold derivatives over more than two decades in the financial industry.

Wall Street is accustomed to getting its way with derivatives legislation...."

a little help, hopefully, from http://www.newyorkfed.org/newsevents/news/markets/2009/ma090908c.pdf :

"For Interest Rate Derivatives:
- Each G15 member (individually) commits to submitting 90% of new eligible trades (calculated on a notional basis) for clearing beginning December 2009.
- The G15 members (collectively) commit to clearing 70% of new eligible trades (calculated on a weighted average notional basis) beginning December 2009.
- The G15 members (collectively) commit to clearing 60% of historical eligible trades (calculated on a weighted average notional basis) beginning December 2009.

For Credit Default Swaps:
- Each G15 member (individually) commits to submitting 95% of new eligible trades (calculated on a notional basis) for clearing beginning October 2009.
- The G15 members (collectively) commit to clearing 80% of all eligible trades (calculated on a weighted average notional basis) beginning October 2009.

Furthermore, we will issue performance metrics that address both new transactions and the outstanding trade population on a monthly basis. The first report will be issued on the 10th business day of October 2009 and will be in respect of September 2009, and for each month thereafter, the relevant report will be issued as part of the monthly metrics we currently report...."

from the Senior Managements of:
Bank of America-Merrill Lynch
Barclays Capital
BNP Paribas
Citigroup
Commerzbank AG
Credit Suisse
Deutsche Bank AG
Goldman, Sachs & Co.
HSBC Group
International Swaps and Derivatives Association, Inc.
JP Morgan Chase
Morgan Stanley
The Royal Bank of Scotland Group
Société Générale
UBS AG
Wachovia Bank, N.A.

another interesting trend - from www.sungard.com/enterpriserisk

"It is becoming increasingly common for banks to charge their front office trading units for the expected losses and the capital cost of credit risk generated by their derivative trades. This charge is an internal estimate of the cost of counterparty credit risk incurred in the course of trading activities and serves as a method of encouraging the front office to manage credit exposure prudently and charge for it properly. At the same time, the credit risk so created is itself monitored, managed and hedged in the derivative markets by a desk established specifically for this function."

good opinion piece (including comments) about credit rating agency "reform" - guess it will be up to the courts, rather than rules/laws imposing standards similar to those required of auditors:

http://online.wsj.com/article/SB10001424052748704471504574441273559132330.html#articleTabs%3Darticle

http://www.ft.com/cms/s/0/b033d3e0-bd10-11de-a7ec-00144feab49a.html?nclick_check=1

"....First, the market is increasingly concentrated between a small number of institutions. In Europe, two thirds of banks' CDS exposures are concentrated on their 10 largest counterparties. Worldwide, five banks - two of which are based in Europe - account for half of the CDS market.

This concentration has increased since the beginning of the financial crisis, as several major counterparties have exited the market. Players outside the banking sector, such as hedge funds, now account for less than 10 per cent of all CDS trades. Such a level of concentration is a factor of vulnerability, a risk for the liquidity of the market and a threat to efficient pricing.

Another interesting feature is the interconnected nature of the CDS market. In fact, not only do leading CDS players trade primarily among themselves, but they also increasingly exchange guarantees against their own default: six out of the 10 most traded contracts on non-sovereign entities are in fact guarantees on the very same CDS dealers...."

In other words, dealers are guaranteeing dealers on a risk incurred on the dealers' community. This circularity implies that the transfer of risk has become more limited than expected.

Taken together, concentration and "interconnectedness" amplify counterparty risk and the potential systemic consequences of a default by one major market participant. This is why authorities have vigorously promoted the clearing of CDS by central counterparties (CCPs)...."

It's why I'm skeptical in the run-up of our various US stock indices and any alleged economic recovery. I'm not hearing companies reporting significant increases in sales, and I wonder how much of the alleged good earnings news is a combination of fees on investment trades and various choices about how to book certain transactions and asset valuations.

I found this article interesting for a number of elements: http://www.huffingtonpost.com/art-levine/bailout-trickle-down-to-k_b_326934.html

This quote reminded me of the need for bankers to pay attention to the ABA's proposal about "too-big-to-fail" institutions:

"....On top of all that, influential bankers and economists are starting to challenge the administration's concensus view that the huge banks created by shotgun mergers can be held in check by current and pending regulations. As former International Monetary Fund banker-turned-reformer Simon Johnson writes in his blog Baseline Scenario:

In contrast [to the administration's view], in an interview reported in the NYT this morning, [former Federal Reserve chairman] Paul Volcker argues that attempts to regulate these banks will fail:

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company.'

Volcker may not have the ear of the President (as the NYT points out), and Alan Greenspan - also arguing for bank breakup, but along different lines - might also be ignored. But watch Mervyn King closely.

Mervyn King is governor of the Bank of England and a hugely influential figure in central banking circles. Time and again he has proved to be not only ahead of his peers in terms of thinking about the latest problems, but also the person who is best able to frame an issue and articulate potential solutions so as to draw support from other officials around the world...."

RiskAlert published Mr. King's latest speech today.

I also checked out a website last night - www.oligopolywatch.com - to try to figure out why I'm concerned about concentrations of power. It boils down to 2 things - lack of competition, and barriers to entry. This website suggests several things:
1. There's a tendency for all industries to push toward oligopolies.
2. Where oligopolies exist, pricing of that industry's products and services tend to go up, via [in]formal collusion, or less often, down in a price war begun by one member of the oligopoly (think of what's happening to book prices now between Amazon and Borders and Walmart) - unless there's some strong mitigating control (think of public utilities commissions and cable TV services).
3. The mortgage and derivatives industries are oligopolies (the combination of Fannie/Freddie/VA/FHA for mortgages, and the Wall Street firms mentioned previously for derivatives), and we need to figure out the best mitigating controls available to offset the dangerous potential consequences.

http://www.ft.com/cms/s/0/29262b00-ca76-11de-a3a3-00144feabdc0.html?nclick_check=1

"....Legislation to force more over-the-counter derivatives through central clearing and on to exchanges would cost the government $872m over four years, the CBO found. The money would be needed to increase staffing and computer systems at two regulators...."

http://www.riskcenter.com/story.php?id=19207

"....But the bank lobbyists were able to pull off their greatest trick yet. Little noticed in the debate was an amendment to the bill that defined an ASEF as an entity that "facilitates" the trading of swaps, and which includes a "confirmation facility" or "voice broker". Thus with a few simple words was a pre-trade execution requirement turned into a restatement of current business practices.

Under the new definition a bank can meet the exchange trading requirement by doing its trades on the telephone, as is done today, or even simply by later documenting that a trade took place through a "confirmation facility," which the industry has also already committed to do. Nowhere in the new definition of an alternative swap execution facility is there an actual requirement that bank customers can see and compare prices, nor actually make a trade. ..."

more interesting observations and theories, from http://nationalmortgagenews.com/columns/hearing/ :

"....housing and commercial markets won't start to recover until banks, thrifts and Wall Street firms start unloading their $1 trillion or so in massive holdings of delinquent mortgages. So far, I would guess that maybe $10 billion in bad mortgages have been sold in the NPL market in the past six months, or just 1% of the problem. ...Until banks start selling their NPLs, real estate markets will not reach a floor and a recovery will not happen until a floor is found. If we've only sold 1% of the problem -- and that figure doesn't include the coming deluge of commercial mortgages, where does that leave us? The only thing preventing this crisis from going totally nuclear (as in meltdown) is the change in FASB accounting rules on mark-to-market and hope (pray for us, Lord) that unemployment improves and workers start returning to all those not-very-full office buildings, strip malls, and idled factories...

Commercial real estate deal of the young century or just another bottom fisher? You decide: In Michigan the Pontiac Silverdome -- once home to the Detroit Lions -- was recently sold for $583,000, or about 1% of the $55.7 million it took to build in 1975. Folks, that's not a misprint. See the article at: http://features.csmonitor.com/economyreb...old-for-583000/
....

MACRO ECONOMIC STUFF: The stock market meltdown of the past 18 months has caused investors to seek a safe haven in Treasury bonds. As bond prices increase (because of demand) yields will stay low -- which means mortgage rates will stay low for awhile. .... gold is trading at $1,100 an ounce. ...Will this lead to another asset bubble, and if so, who will be hurt by a gold bust? Banks? I don't think so. Nations that have been buying gold? You're getting warmer..."

Interesting proposed fix, from http://www.riskcenter.com/story.php?id=19362 :

"The financial reform legislation that passed the House last week doesn’t fix the derivatives market but there is still time to make it right. The Senate hasn’t passed its version of the bill and all Senators need to do is include a provision stopping the Federal government from preventing enforcement of state and local criminal gaming and bucket shop laws. With this simple legislative change bookies that run illegal derivatives casinos will face criminal prosecution rather than become millionaires who benefit from government bailouts and guarantees. The problem that needs fixing is that in 2000 Congress and the Clinton Administration decided to de-criminalize gambling and bucket shops so long as these activities are couched as enterprises trading credit default swaps and other financial derivatives. Since 2000, Wall Street bookies have run a booming gaming business while the rest of us pay for bets that go bad. ...

About 10 years ago the Commodities Futures Modernization Act of 2000 was signed into law by President Clinton and specifically exempted states from enforcing their gambling and bucket shop laws in connection with commodities contracts and dealers. In the legislation the definition of a commodities contract was expanded to include all sorts of financial contracts that have little to do with actual commodities as most people understand the term. As a result, the scope and reach of the gaming and bucket shop exemption grew to unbelievable proportions. Some experts estimate that the credit default swap and derivatives market is as large as $600 trillion. Since the law was changed the U.S. economy has been held hostage by Wall Street casinos where large institutions make book for gamers that belly up to the bar with trillions of other people’s money...."

If Congress can conveniently propose to "update" the Clean Water Act by removing a single word - "navigable" - thereby permitting the Feds to regulate virtually all collections of stagnant and moving water (with, of course, some exemptions), then maybe it can do this. Surely $600 trillion exceeds any estimated value of tangible collateral that was ever related to CDOs and CDS'....

seems like a good primer on the issue of transparency and derivatives: http://www.isda.org/researchnotes/pdf/ISDA-Research-Notes1.pdf

It has some excellent charts about different types of securities and degrees of available data.

For the CDS, it refers to
"Transaction transparency. The major source of pre-trade and post-trade information for CDS is Markit, which offers two main CDS data services. One is indicative intraday spreads, which are based on bid and offer prices provided by dealers. These spreads are not officially “live” prices that can be hit or lifted, but are considered to accurately reflect the current terms on which posting firms will transact. The other data service is end-of-day consensus prices, which are based on book of record prices at active market makers and used by subscribers to mark their books to market. The services provide data on the full yield curve and not just the most liquid 5-year point....

Recently, Markit has combined price and position transparency in a page displaying last quotes for the most liquid CDS contracts; the table is linked to the CDS Market Summary page described above. The table displays net notional amount and number of contracts outstanding (obtained from DTCC), along with most recent price quotes from active dealers, for on-the-run indexes and for the most liquid single-name contracts."

something else to follow: http://www.nytimes.com/2010/01/21/business/21tax.html

"....In September 2008, a Senate subcommittee issued a scathing report, “Dividend Tax Abuse,” that accused Wall Street banks of marketing and selling complex swaps intended to evade taxes on dividend payments.
....A typical equity swap involves a hedge fund agreeing to pay a Wall Street bank’s losses on a stock in exchange for the bank’s promise to pay stock gains and dividends to the fund. Because the swaps are derivatives, no shares actually change hands.

The I.R.S. directive identified four types of swaps: cross in-cross out; cross in-interbroker dealer out; cross in-foreign affiliate out; and synthetic equity transactions."

may explain why my intuition has led me away from analyzing the Volckher rule - too many "powers-that-be" have drifted away from addressing the real economic problems:

from http://www.riskcenter.com/story.php?id=19586 :

"....The creation of Warehouse Trust as a Fed member bank marks the latest attempt by the large dealer banks and the DTCC to cover the retrograde OTC derivatives market in the clothes of modern respectability. The solution to all things bad in the world of OTC derivatives, you see, is centralized clearing. ....Indeed, if you listen to the folks at the Fed, the DTCC and the large OTC dealer banks, the advent of centralized clearing is just barely less momentous than the second coming of the Messiah.

....It is in the front office where the true problems reside, but notice that none of the OTC reform proposals nor the Volcker Rule go anywhere near the sales and trading desks at the large banks.

Based on our study of the Volcker Rule, which proposes to strip all of the largest banks of their proprietary trading arms, we know that solving the problem is not the real object of financial reform in Washington. Just as the Volcker Rule does no violence to the sales and syndicate function of the largest Sell Side banks, the proposed OTC derivatives reform legislation leaves the dealer monopoly in OTC intact and just barely improves the degree of regulatory oversight of these closed, private markets.

In technology terms, fixing the back office issues of OTC derivatives or securitizations with innovations like Warehouse Trust is akin to announcing a new venture to build cars with internal combustion engines. ...

The aspects of the OTC markets which remain off the reform table includes the bilateral relationship between the client and dealer regarding credit and collateral, the lack of complete market price transparency and the lack of any significant secondary market trading, all to maintain the monopoly rents that the large OTC dealers earn from this activity. Today's OTC markets have all of the attributes of a 1920s bucket shop and now the hub of this closed monopoly market is the DTCC, especially as the clearing house evolves inevitably into a central counterparty for all OTC trades. ..."

another aspect, similar conclusion - http://www.riskcenter.com/story.php?id=19591 :

".... there is no OTC derivative asset class, including interest rates, foreign exchange (FX), credit, equities and commodities, with aggregate post-trade workflow automation greater than 57%. Furthermore, interest rate swaps have the most trade errors of any OTC asset due largely to non-automated affirmation and confirmation processes. Electronic trading, because of the very nature of the way order information is handled, would eliminate many of these errors.

The problem is, says Rowady, the major broker dealers, specifically the top five U.S. banks with a 97% share of commercial bank exposure to OTC derivatives (or 34% of global exposures) and counterparty to nearly every trade in these markets, remain largely on the sidelines maintaining and protecting their OTC franchises...."

Excellent article on the interaction between poor GAAP (especially FASB 140) accounting for securitizations and derivatives valuations over the past 2 decades: http://www.securitiesexpertsroundtable.com/files/goodbye_and_good_riddance.pdf

Since 11/15/09, entities have had to incorporate FASB 166 and 167 into their recordkeeping. One CPA newsletter summed up the effect this way: "• Assets under securitization would have to be consolidated back to the original banks. It will be very difficult for banks to take loans off their books and securitize them. This will hinder banks’ ability to take non-current loans off their books.

In a news release, FASB said “the impact of both new standards has been taken into account by regulators” in “stress tests” they conducted during the first quarter of 2009 on 19 large banks."

If Congress continues to look elsewhere, maybe this effort will work, from http://www.riskcenter.com/story.php?id=19671 :

"....The Fed's current interest rate policy has caused the City of Los Angeles to go into the red to the tune of $10 million per year because of interest rate swaps sold to the city by Bank of New York Mellon (BK). That's right, thanks to Chairman Bernanke and the FOMC, and an OTC interest rate swap, the City of Los Angeles must pay $10 million per year to BK so long as the Fed continues ZIRP [zero interest rate policy] -- potentially until 2028.

By skewing interest rates down below the true rate of inflation, the Fed has levied a tax on all of the OTC interest rate counterparties that were trying to hedge against higher interest rates. And there are literally thousands of other cities, states, public agencies and insurers around the world which are caught in the unintended consequences of ZIRP. When you recall that the Fed has been and continues to be the chief cheerleader in Washington for OTC derivatives, the implications for the global economy are truly mind boggling.

Needless to say, the City of Los Angeles is not very happy with the folks at BK nor with the other large, OTC derivative dealer banks that are the chief recipients of the Fed's largess. In fact, Los Angeles is thinking about moving billions of dollars in municipal deposits as well as nearly $30 billion in pension assets away from the largest banks in order to redress the perceived wrongdoing by BK and other large banks. ....

public sector agencies [should negotiate] the repudiation of OTC derivatives positions that are causing unanticipated losses to customers like the City of Los Angeles. The message to the OTC derivatives dealers is simple: Take back the deceptive, unfair and misleading OTC contract or else the public sector client will pursues any and all options. Remember that defrauding a state agency is a felony in most jurisdictions. ..."

The White House draft for proposed Volcker rule legislation barely defined "proprietary trading", to the point that the Brookings Institution said this http://www.brookings.edu/opinions/2010/0304_volcker_elliott.aspx :
"....Any investment owned by a bank for its own account can be considered proprietary, in the larger sense that the bank absorbs any losses and keeps any gains. Therefore, the rule is forced to rely on judgments as to the intent behind the purchase of the asset. ...Unfortunately, separating out the targeted activities from the permitted ones risks forcing regulators to micro-manage the investment side of banking...."

and the Cambridge Winter Center for Financial Institutions Policy concurs http://www.cambridgewinter.org/Cambridge_Winter/Archives/Entries/2010/1/27_THROUGH_THE_LOOKING_GLASS_%28STEAGALL%29.html :

"....Indeed, it was the proliferation of such “shadow banking” that was perhaps the single biggest driver of the credit bubble and ensuing crisis and government response. But the Volcker Rule, as currently defined, does not apply to most investment banks. Indeed, if the largest investment banks (Goldman Sachs and Morgan Stanley) were to give up their bank holding company status, the Volcker Rule would leave even them untouched...." (The Presentation on the link is outstanding.)

And, lest we think that simply becoming traditional lenders, with lots and lots of capital helps, take notes from 1980s TX banking history (courtesy of the ABA, in a speech given today):

"....When the 1980s began, the 10 largest banks in Texas had 25% higher capital ratios than did their peers. Before the decade was out, 9 out of those 10 either failed or were rescued by an out of state bank.....They were lenders, they stuck to what advocates of the Volcker Rule would call traditional banking. They were heavily concentrated in lending. That’s the Volcker Rule. In size, they were the smaller banks that seemingly the Volcker Rule would call for, $10 billion, $20 billion, $30 billion banks.

And when the economy they lived in went south, so did they, with no other sources of income to offset their losses. None were too big to fail, and so 9 out of 10 of them effectively did fail...."

Monitoring the status of this latest White House proposal may be important....

from http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN03098:@@@T
about the PROP Trading Act (S. 3098):
"S.3098
Title: A bill to prohibit proprietary trading and certain relationships with hedge funds and private equity funds, to address conflicts of interest with respect to certain securitizations, and for other purposes.
Sponsor: Sen Merkley, Jeff [OR] (introduced 3/10/2010) Cosponsors (5)
Latest Major Action: 3/10/2010 Referred to Senate committee. Status: Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.
--------------------------------------------------------------------------------
TITLE(S): (italics indicate a title for a portion of a bill)

OFFICIAL TITLE AS INTRODUCED:
A bill to prohibit proprietary trading and certain relationships with hedge funds and private equity funds, to address conflicts of interest with respect to certain securitizations, and for other purposes.

How can proposed legislation have been "read twice" and referred to a committee, when its text isn't available to anyone publicly? Press releases mean nothing.

Don't worry - it will be on-line in a day to two after the GPO office get's it.

or maybe not, if it's not yet written fully and the press conference acted as a trial balloon to solicit reaction....

Here's a quote from the US Senate Rules that may explain the "read twice"
http://rules.senate.gov/public/index.cfm?p=RuleVII

"6. Senators having petitions, memorials, bills, or resolutions to present after the morning hour may deliver them in the absence of objection to the Presiding Officer's desk, endorsing upon them their names, and with the approval of the Presiding Officer, they shall be entered on the Journal with the names of the Senators presenting them and in the absence of objection shall be considered as having been read twice and referred to the appropriate committees, ...."

Looks like the description of the S.3098 as a placeholder would meet this rule.

They still have to present the documents.

Link to S.3098 (copy/paste) -
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s3098is.txt.pdf

I couldn't find any upcoming hearings on these 11 pages; my guess is that the Senate Banking Committee will concentrate on the 1336 page Dodd proposal and have this as a fall-back if the other doesn't pass....

American Banker summary (http://www.americanbanker.com/issues/175_50/drilling-down-dodd-1015945-1.html?ET=americanbanker:e2540:1563977a:&st=email )
of Dodd bill derivative section:

"• Derivatives Regulation: The bill has an entire section devoted to better regulation of derivatives. It would require central clearing and exchange trading for derivatives that can be cleared (a determination made by regulators) and would require margins for un-cleared trades in order to offset their greater risk. It would require data collection and publication through clearing houses to improve transparency."

Lawyers weighing in on CDOs:
http://www.nationalmortgagenews.com/lead_story/?story_id=212

"....Grais' firm is arguing that, under both state and federal law, the securities dealers were obliged to ensure that the mortgages they securitized during the housing boom's waning months met the underwriting standards stated in each bond's prospectus...."

CFTC head Gary Gensler on part of the Dodd bill - http://www.riskcenter.com/story.php?id=19764

"....All standardized transactions, regardless of whether they are between two Wall Street banks or between a bank and a corporation, should be subject to a clearing requirement. ...many of you disagree ...and favor exemptions from clearing for businesses hedging their risk. You have concerns that the margin – or collateral – required to clear derivatives could be costly. Derivatives dealers, however, already charge counterparties for credit extensions when they do not clear their transactions. How can you know that these costs charged by the dealers – embedded and opaque – are less than the margin associated with clearinghouses? At least margin requirements imposed by clearinghouses are transparent to all market participants and subject to review by the appropriate regulator. ...

....Depending on how this debate comes out, up to 60 percent of the standardized marketplace could be left without the essential traffic regulations that will lower risk in the system. ...the 57 percent of the market comprised of financial end-user transactions should be covered. This would significantly reduce in the future the same risk that reverberated throughout the economy during the financial crisis. How else do we reduce the risks posed by dealers that are both “too big to fail” and “too interconnected to fail?” If financial parties are exempt from clearing their transactions, we must ask ourselves why taxpayers should again be on the hook for the risks of an interconnected financial system....

For those clearable transactions that do not trade on a regulated trading platform for any reason, statutory language should be enacted that establishes real time public reporting for those swaps. We have seen the benefits of such real time reporting in the corporate bond market, where it aided liquidity and lowered costs...."

Then there's the need to ensure that the collateral underlying any swaps/derivatives/repurchase agreements/reverse repos and securities loans is changed only under appropriate controls, transparency and valuations - see an outstanding investigation and transaction details at
http://www.bloomberg.com/apps/news?pid=20601109&sid=arFjbsBO7BS8&pos=10

"....“The fee structure encouraged TCW to put lower-rated bonds into CDOs over time.”

A look at the month-by-month transactions in one CDO -- Davis Square III, named for a difficult-to-navigate section of Somerville, Massachusetts, near Harvard University -- shows how collateral replacements helped drive New York-based AIG to the brink of disaster. The insurer ended up paying $616 million to make up for Davis Square III’s loss in value and more than $35 billion overall, liabilities that helped push it into insolvency in September 2008.

Lucido’s team, following criteria set by Goldman Sachs, changed almost one-third of the collateral in Davis Square III after the CDO’s creation in 2004, according to data compiled by Bloomberg from Moody’s Investors Service reports. The securities were mostly backed by the types of newer loans that are going bad at more than twice the rate of older ones...."

It gets worse. Unfortunately, I don't have time to dig into Dodd's bill to see how it may mitigate such activity, or whether actions by the NY FRB and FASB 166/167 will take care of any repeat of this...