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  • Is the VIX Index Useful? [View article]
    The VIX is a good market indicator but using it as a trading instrument is exceedingly inefficient. Better ways to skin that cat.
    Apr 30 09:01 AM | 3 Likes Like |Link to Comment
  • The Basel Committee will require global banks to hold Tier 1 capital of 9%, according to a draft proposal, and will be able to demand banks boost that figure to 12% in boom times. At present, banks are required to have a Tier 1 ratio of no less than 4%.  [View news story]
    Mark-to-Market is great in theory, but doesn't always work as intended during times of distress (when its supposed to provide the greatest clarity into a company's balance sheet).

    There are times when relatively safe corporate bonds, Single-A rated companies that are in no immediate or long term risk of default see their bonds trade down to well below levels that would be considered distressed.

    So would you call insolvent a bank that held nothing but solid investment grade corporate debt, debt that was solidly over-secured by real tangible assets that in a worst case, world is ending scenario could be sold and satisfy the debt 2 times over?

    Because that is what universal mark-to-market would do to a lot of banks.

    The problem, which most fail to correctly identify, is that banks, investment banks, and asset management firms are three distinctly different entities and should have different capital requirements, different business models, and entirely different portfolios of long term holdings.

    The present problem is that all three operate as quasi-hedge funds. Fix that, and you'll fix the problem.

    Capital requirements is one sure fire way to do it. Better disclosure is another (as in line item disclosure of holdings) and let investors judge the soundness of the balance sheet with real information. Separating banking from investment banking is another. Retail banks shouldn't be in the business of investment banking, period. And lastly, don't allow investment banks to operate as public companies (just as law firms, etc can't operate as public companies). Force them to operate as partnerships, sole proprietorships, whatever. That simple change alone will curtail their ability to raise capital, take on leverage, risk, etc.

    Let hedge funds take risk, let investment banks advise companies and issue/trade securities, let commercial banks take deposits and make safe loans (and require them to hold onto a signficant risk position if they decide to sell the asset or securitize it with the assistance of an investment bank), and let asset management companies manage long-only mutual funds/pension funds/etc.

    Our problem throughout this crisis has been an almost laughable focus on the wrong topic at the wrong time. Good to see that continues to this day.

    During the height of the mortgage crisis, we tried everything but that which would have quickly worked. During the banking crisis we tried to curtail paychecks, and we succeeded magnificently in curtailing the paychecks of the middle earners in those banks. We've also tried to fix the problem of prop trading in banks, a problem that shouldn't exist in any form or fashion. The list goes on and on.

    It truly is laughable. And thankfully, it's typically exploitable in the capital markets.
    Sep 7 09:34 AM | 1 Like Like |Link to Comment
  • It's misleading to suggest that only 3% of small businesses would be impacted by ending the Bush tax cuts, Kevin Hassett writes; 48% of the net income of sole proprietorships, partnerships and S corporations goes to households with incomes above $200K. "That's the number to look at, not the 3%," which counts everyone who makes a few bucks on eBay.  [View news story]
    Lies, damned lies, and statistics.

    And thats coming from a quant, LOL.
    Sep 3 05:55 PM | 3 Likes Like |Link to Comment
  • The U.S. government says it would immediately issue a new ban on deepwater drilling if it loses an appeal set for today, setting the stage for a fight that could go to the Supreme Court.  [View news story]
    Rule of law? Ha, I laugh in your face!
    Jul 8 02:39 PM | 5 Likes Like |Link to Comment
  • Just in case you thought the housing market wasn't bad enough already, Barry Ritholtz believes home prices are still too high and will sink below historic levels. "Without the heavy hand of the government intervening, the residential real estate market is about to experience what price discovery [through basic supply and demand] is all about."  [View news story]
    Again, it depends entirely on what city you are talking about.
    Jun 24 03:42 PM | 1 Like Like |Link to Comment
  • Just in case you thought the housing market wasn't bad enough already, Barry Ritholtz believes home prices are still too high and will sink below historic levels. "Without the heavy hand of the government intervening, the residential real estate market is about to experience what price discovery [through basic supply and demand] is all about."  [View news story]
    Depends entirely on where you live but in many cases, you are absolutely correct.
    Jun 24 03:36 PM | 2 Likes Like |Link to Comment
  • House Judiciary Committee signs off on legislation that would repeal the Limitation of Liability Act of 1851 that would limit BP (BP) and Transocean's (RIG) liability in the Gulf oil spill. The bill, which applies to both pending and future cases, passed 16-11, sending the measure to the full House for consideration.  [View news story]
    Rule of Law?

    Jun 23 03:03 PM | 1 Like Like |Link to Comment
  • The Financial Crisis Inquiry Commission runs the risk of becoming a mere footnote to a crisis it should have dissected long ago, David Weidner writes. "Nearly 10 months after its first meeting, it's hard to name one significant contribution the commission has made to the discussion."  [View news story]
    Risk taking that wasn't understood which was at least in part fueled by moral hazard that was introduced by previous administrations.

    Stupidity on the part of many American's borrowing more than they could afford.

    Too much leverage at all points within the system.

    There, I've done their job for them.
    Jun 10 03:30 PM | 2 Likes Like |Link to Comment
  • Pure stupidity would be more apt.
    May 25 12:58 PM | 1 Like Like |Link to Comment
  • The financial reform bill is a "disaster," will cause a "huge" contraction of credit and push some derivatives activity offshore and out of U.S. control, Sen. Judd Gregg says. He fears the new consumer protection agency will make lending decisions based on "social justice purposes instead of safety and soundness purposes."  [View news story]
    Actually, my analysis was spot on, yours is quite flawed however. Please explain to me how this real estate crisis occurs if delinquencies (and subsequently defaults) don't spike upward? Even if CDO's, RMBS, heck, securitization as a whole didn't exist, we'd have still had a massive problem given the level of delinquencies and defaults in the mortgage market. All the RMBS market did was spread the risk to institutions that wanted it and all the CDO/CDS space did was allow for people to take leveraged views on the RMBS market. Banks/investors/etc would have still had major issues because people chose to borrow more than they could afford and then chose not to pay it back.

    Perhaps my nomenclature was off a bit, but if you make less than $100k a year and live in San Diego, you are poor, there's really no other way to put it. $100k just doesn't go that far in LA, Las Vegas, or Miami either. Might be upper middle class in many parts of the country, but not in those areas. And you are right, people pulled money out of their homes to speculate, either in the R.E. market as you noted, or for personal expenses (paying off credit cards was very popular as was purchasing cars, vacation homes, etc, etc, etc). Anyway you cut it, these people are to blame (and you are right, it's not just the poor, there are upper middle class borrowers that are absolutely just as guilty). They are the root cause. Had they paid the mortgage they took out of their own free will, this mess would not have occurred. And that is an undeniable fact.

    You simply cannot say with 100% certainty that had securitization not existed at all, that this crisis would not have occurred in any form. I can say with 100% certainty that had people paid their mortgages back on time, this crisis would not have occurred at all. Period.

    As I noted, I'm interested in the root cause, not mistakes made down the road (there were obviously many). And that root cause is people not paying their mortgage and the subsequent shirking of personal responsibility that occurred (and that was allowed to occur by our government). Securitizations didn't cause anyone to default. CDS on CDO's didn't cause anyone to default. CDO's don't cause property values to go up or down in a vacuum. And none of that has any effect on whether people pay their mortgages on time.
    May 24 04:45 PM | 1 Like Like |Link to Comment
  • The financial reform bill is a "disaster," will cause a "huge" contraction of credit and push some derivatives activity offshore and out of U.S. control, Sen. Judd Gregg says. He fears the new consumer protection agency will make lending decisions based on "social justice purposes instead of safety and soundness purposes."  [View news story]
    The fundamental underlying cause was people not paying their mortgages. This was largely a result of people borrowing more than they could afford to repay in an effort to live a lifestyle they could not afford.

    Know its terribly un-PC to blame the poor and disadvantages or to kick someone while they are down, but that's the simple truth.

    If Main St had continued to pay their mortgage on time... The ratings on subprime RMBS would have been meaningless (they already were meaningless to any professional in the industry). Paulson's shorting of CDO's would have been meaningless (actually, he would have lost a fortune). The decline in real estate values would have been meaningless.

    But for some reason, blaming the root causes isn't popular. No one ever forced someone to take out an Option ARM. No one was ever forced to purchase a $600k home on income of $50k. No one was forced to refinance their home and take out equity to (take your pick) take a vacation, buy a new car, pay off credit cards, etc, etc, etc. People made the choice to do that. The terms of the loan they took out were fully disclosed (in the rare instance where the terms weren't disclosed, we already have mortgage fraud statutes on the books to handle that). At some point, people have to stand up and take responsibility for themselves. And if we don't demand if of our fellow man, it doesn't matter how much financial reform we see, this cycle will continue to repeat itself as the consumer will inevitably overlever themselves again and again.

    That is until one of two things happens, the system will completely collapse, or we'll shift to a system of government in which the government dictates to us what we can and cannot do in an effort to protect us from ourselves.

    Personally, I prefer liberty. Seems most of you prefer slavery, socialism, whatever you want to call it. Because if liberty was important to you, you'd be blaming those at the root cause of this crisis, not the guys 3 to 10 steps down the road.
    May 24 02:23 PM | 6 Likes Like |Link to Comment
  • Former BofE official David Blanchflower says another eurozone financial rescue package may be “inevitable” and the euro’s “unstoppable” fall may lead to parity with the dollar.  [View news story]
    You do realize they buy on the bid and sell on the ask right? That alone is a HUGE advantage in trading the markets and a benefit all market makers have.

    In order to have a perfect trading record, all they have to do is cross trades. Simplest strategy in the world for a market maker. Obviously they do more than just cross trades, but you'd be amazed at the % of profits generated by simply acting as a market maker.

    Not sure if you've noticed, but trading volumes in the debt markets have exploded this year relative to the last few, new issuance is WAY up, which drives trading volume. That volume is what is driving trading revenue, and the vast majority of that revenue is due to capturing the bid-ask spread, which in the debt markets can be very wide, especially if you are talking about even a marginally stressed name.
    May 18 03:59 PM | 2 Likes Like |Link to Comment
  • The six major securities exchanges have agreed in principle to the creation of a market-wide circuit breaker system, said the SEC. The system would halt or slow trading on all exchanges during a massive market move.  [View news story]
    Rumor has it that a large hedge fund came into the market and bought a very large block of deep out of the money Puts on the S&P. That purchase required hedging by their trade counterparties. Given the size of the purchase, the hedges that were necessary weighed on what was already a pretty frothy market last Thursday pushing it lower. That selling begat more selling. At that point, the majority of the smart HFT's pulled the plug on their trading as the "risk profile" of the market was moving into a zone where their trading strategies break down. So they closed positions and started watching from the sidelines. This massively reduced liquidity in the market and with sellers now coming into the market induced an extremely violent, sharp decline. Which was then reversed when program trades kicked in to scoop up shares at deep, deep discounts.

    Least thats the rumor going around the markets presently.
    May 11 09:06 AM | 1 Like Like |Link to Comment
  • Lawmakers are considering legislation that would bar investment banks from betting against their own clients in many cases. The goal is to reduce conflicts of interest, but the ban could be easily side-stepped unless the bill's language is airtight.  [View news story]
    If an iBank can't take the other side of a trade and is forced to only pair buyers and sellers of securities, liquidity will go bye-bye.

    But why would our gov't consider that??
    May 10 08:57 AM | Likes Like |Link to Comment
  • The Obama administration is supporting a "significantly" higher limit on damages that BP (BP +3.1%) would face for Gulf cleanup, over an existing $75M cap. Senate Majority leader Reid supports a $10B cap; any new limit would be applied retroactively. (earlier: I, II)  [View news story]
    If all comes down to how the law that is presently on the books (one that has not been declared unconstitutional at this point regardless of your opinion as to its constitutionality) is worded.

    If the law, as written, limits liability (economic, statutory, etc), then that is the limit that should apply. The law was originally put on the books in an effort to encourage oil exploration. Our gov't isn't stupid (well, they are sometimes, but thats another story), they do actually realize that the cost of exploration, if you were to take on 100% of the legal liability for an accident, is potentially too high for any company to entertain.

    Given our government wanted the oil in the gulf, they passed a law that incented businesses to explore and exploit the oil reserves in that region.

    As I said, it ALL COMES DOWN TO HOW THE LAW IS WORDED. If its a strict limit on liability on the part of the operator, which I would assume it is, their liability is capped, period. So long as the law has not been ruled unconstitutional as of yet, it is binding law.

    Unless the rule of law no longer applies.

    I don't agree with it, I think they should be liable, but I believe in the rule of law even more.
    May 5 07:10 PM | 1 Like Like |Link to Comment