dlaw

What the Treasury Plan Needs: Price Discovery, Writedowns and More

"Price Discovery"???

How about we figure out what the heck these jokers are even trying to sell us first?

Is Goldman Covered by the Community Reinvestment Act?

This obsession with the CRA is completely absurd.

Given American banks' practice of selling essentially counterfeit securities, the only way anyone could blame the CRA for anything is if he had decided in advance that Wall Street is not responsible for its own behavior and everything is always the government's fault.

If American financial institutions spent as much time doing useful work as they spent dodging, gaming and lobbying away every rule in the marketplace the nation and world would be rich, instead of headed into a depression.

Buffett Serving Free Lunch? (Part II)

Edifish,

Thank you for your interest.

I think you'll find it's not a case of conspiracy theory or anything else.

Some people bought some things (the puts) that have appreciated enormously in value. If these people are risk averse, as you suggest, then it's even more likely they will act to put the money in their pockets and invest it in safe instruments.

These are private transactions, so there is no direct evidence, but somebody has been buying a lot of Berkshire CDS. If Berkshire isn't going broke (and it isn't) why would someone do that? The most likely answer is what Mr. Clavell suggested - a hedge.

Buffett Serving Free Lunch? (Part II)

TomR - I'll leave it to experts to fill in the amounts, but I would say:

Sell puts very similar to the ones Berkshire sold but at the much-higher-price they would command in the market today, thus netting out the position. Their cash profit would be what they take in versus what they paid Berkshire.

They could use some of the money to buy calls or go long futures as well, thus profiting from the upside as well as the downside.

And they could buy CDS to hedge the risk that Berkshire won't be able to make good on the promised payment.

Buffett Serving Free Lunch? (Part II)

Just to try one more time, the Berkshire options are not (so far as I know) exchange traded. But the people hedging those options will do so on exchanges. Because Buffett so badly mispriced so very many options, the options market itself - for those strikes - has been mispriced.

It's an indirect, probability-based effect, but it is a real effect.

These markets are all connected. Again, a one trade in the market affects ALL other trades. That's just the physics of it.

Buffett Serving Free Lunch? (Part II)

Thank you all for the comments.

All of the comments basically hit the same topic and I should have mentioned it in the piece.

First, those who say that Buffett can hedge haven't thought it through and don't know Buffett. The cost of hedging will be astronomical and easily wipe out any profits he might realize by holding to expiration and Warren Buffett is not really a guy who hedges (although his increase in CDS bets smack of a "double down"). His only saving grace in this thing is that he does buy and hold.

So Buffett really has to hold the options and suffer the consequences of failing to price liquidity risk. Remember how far away from the market these options will be. That's a huge inventory overhang in the out-of-the-money strikes. It will skew the options market for many years to come.

The Smoking Gun of the Credit Crisis: FICO

The thing I do blame Fannie and Freddie for is not taking the AUS data and having it analyzed with sophistication. There should have been logs of multiple logins, changes in info, and data that did not fit statistical norms.

The Smoking Gun of the Credit Crisis: FICO

Gemonk, You still have to account for the fact that Fannie and Freddie have LOWER default rates than the private banks. LOWER.

Here's a quote from an industry group about the new Desktop Underwriter 7.0:

"Stop fraud
Other changes are intended to deter fraud. For example, during the boom times, brokers were known to submit a borrower's application repeatedly, fudging the debt and income numbers each time, until Desktop Underwriter granted an approval. DU 7.0 is believed to limit the number of times that the financial figures on an application can be changed; after that, the application is locked out, similar to the way an ATM will reject your card if you enter the wrong PIN multiple times"

In other words, brokers were gaming the system.

And Gemonk, it is not as if a bank is IN ANY WAY required to lend just because Desktop Underwriter says it's okay. DU does not suddenly take the money out of a bank's Federal Reserve account and do an instant closing. It's a tool - one that was badly, badly misused.


On Nov 20 05:46 PM gemonk wrote:

> I have been a mortgage underwriter for many years. FICO is a big
> issue, but even more so is AUS - the automated underwriting sysytems
> used by the GSEs. Fannie uses Desktop Underwriter (DU), Freddie
> uses Loan Prospector (LP), and others have their own in-house systems
> modelled on the GSEs.
>
> Once the AUS made a buy decision, it was virtually impossible to
> overturn, even if you knew there was something not right about the
> findings. Between 2000 and 2006, underwriting standards became slacker
> and slacker, and a higher and higher proportion of loans were approved
> by AUS.
>
> I also underwrote sub-primes for the wall street investors. They
> did not ever want to hear "this is not a good loan". they bought
> all this trash knowing it was trash - "the model accounts for fraud
> and lower credit quality" they said repeatedly. Whistling past the
> graveyard...

The Smoking Gun of the Credit Crisis: FICO

Thanks for the comment.

FICO over-predicted and, of course, FICO under-predicted default rates. And yet FICO was totally trusted as the underpinning to all the major securitization markets.

No wonder we have a problem and no wonder our paper is not trusted.

Betting on Goldman's Future

Hmm, do you think Paulson's assessment that we might need some of that TARP money later might have something to do with his knowledge of GS?

How Banks Hedge Counterparty Risk

What I want to know - if anyone out there can understand what I'm asking - is why this "meta-hedging" (if you will) does not ultimately reduce to a "martingale".

At some level, the logic seems to be that the more the bank bets the more the bank reduces risk - ad infinitum. But this seems to me to be quite wrong as the frictional costs of unwinding so many trades will be prohibitive - especially in a market without definite and high-speed clearing mechanisms.

The Great Bank Rush of 2008: What's the Money For?

Wow is there are good observations here - really important stuff.

I don't agree with all the author's conclusions but so what?

He raises questions important enough that we should all be re-thinking our conclusions.