Archive for September, 2008
Many critique Wall Street on this mess. Well, folks, yes Wall Street bears some blame, but let me remind you the reader on what was a prime motivator. Read the blog, I really want you to. This blog entry was written in February 2007, just months before this mess was about to start.
Same payment with each scenario…except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and $107,750 more home with the 30 year fixed mortgage. With an interest only product, such as a 30 year fixed rate with a 10 year interest only payment, the savings (or how much more home they could buy) would be even more substantial.
I hardly ever recommend 15 year fixed mortgages to my clients…unless they’re doctors or someone who makes so much money that their mortgage deduction is reduced and they all ready have all the investments they need.
Even if Christy and Tom’s case where they want to ”look around and buy the home where, if we’re lucky, we’ll grow old together”. Why pay off your mortgage and lose one of your best income tax deductions?
Christy, Seattle is not too pricey for normal people…your 15 year fixed mortgage is.
(more…)
Monday, Sep. 29, 2008
by Christian
Time and time again I hear about how banning shorting, or restricting shorting is counter-productive and would require banning or restricting going long. I had a think about this over the weekend and have come to the conclusion it is not the same thing, but very different in two major aspects; psychology, and impact on the innocent.
(more…)
Monday, Sep. 29, 2008
by Christian
You have all probably heard what Steinbrueck has said..
Steinbrueck criticized the United States for failing to adequately regulate investment banks and said free-market policies embraced by the United States and Great Britain that emphasized a short-term "insane drive for higher and higher profits" were partly to blame for the crisis.
So what is his solution?
The finance minister said he would push for a global ban on speculative short selling and would use next month’s meeting of the Group of Seven finance ministers and central bankers in Washington to press for new rules that would prevent banks from fully securitizing loans and selling them to third parties.
But here is the irony as per the German news today… And PLEASE any reader who wants to disprove me do it with facts. The banks that are having problems and did the worst trades are…
…drum roll…
…banks owned or heavily influenced by the German government…. You would figure that the government who is proposing regulations would have regulated their banks?
I cracked up laughing!!! So when the German news asked Steinbrueck about this he said, "well, ahh, oohh, ummm…" Come on Steinbrueck stop the rhetoric and get back to reality! Oh wait, I forgot it is, do as I say, not as I do!
Thursday, Sep. 25, 2008
by Christian
Daily Kos is a left-wing political blog, but they have a pretty good writeup of what is happening with these “credit swaps” and AIG, etc.
It reminded me of reading about mortgage-backed securities about this time last year, just as the shit was hitting the fan in the mortgage market. Now I’m learning about credit default swaps and credit-linked notes.
My questions is: what obscure trading vehicle am I going to be reading about next year? What are the other iffy, confusing, opaque, speculative trades that are going on out there?
Sunday, Sep. 21, 2008
by Jason
A couple of days ago Cramer ranted on how the SEC should do something about shorting. On July 30 of this year I complained about naked shorting! I have had debates with many people on this issue. What the SEC has done is superb!
(more…)
Friday, Sep. 19, 2008
by Christian
The market is down because of the de-leveraging taking place. They are selling because they have to sell…
How do I know? Whispers and those stocks that have been heavily shorted are up. I also don’t think that there is money waiting on the sidelines. I think that is a fairytale!
BTW I am putting in my orders to buy heavily!
Wednesday, Sep. 17, 2008
by Christian
The financial community right now is in melt-down and many think that the world is coming to an end. The question many are asking if the investment banking model is dead?
Answer, no, it will just morph. The thing about finance is that it works until it does not work anymore. So right now things are not working for the classical investment banks. Companies like Blackrock will move from second tier to first tier. Nothing wrong with that. I also noticed that the CEO and other partners at Blackrock are making the financial news channels rounds. That tells me that they are moving into a first tier status.
(more…)
Monday, Sep. 15, 2008
by Christian
This financial crisis has many people saying it was this that or the other thing. I want to present this FAQ as a reference point of what happened. If anybody wishes to add something please send me an email or comment and we can discuss it.
Who is at fault
There are two main culprits, the regulators and politicians, and the quants. Some like to argue that Alan Greenspan is the main culprit because of his low interest rate policy. I personally believe Alan Greenspan is an actor, but not a main actor. I like to think that the Fed is a catalyst.
Why are the regulators and politicians at fault?
The regulators and politicians dropped the ball and let people like Casey Serin get loans. Casey wanted to consider himself a real estate mogule and flipped one house successfully. Then he went full hog and decided to buy 7 more houses that all went into foreclosure. Casey did misrepresent his situation on paper and the banks went right along with it.
You could say, well the bank should not have given him the loan. Yes, yes all true, but like Alan Greenspan a catalyst, not the main problem.
Put this into a bigger context imagine a client that buys a large amount of widgets from you. Would you let them without any down payment, without any real proof of who they are?
Those types of loans are not allowed in countries like Canada, Germany, France, and Switzerland. They had no place in America, and the regulators / politicians should have known better. Note had these other countries allowed these practices the same thing would have resulted.
Why did the regulators and politicians drop the ball? Who knows.
Why are the quants at fault?
On this topic I am not going to get any love from my peers. The problem with the quants is that they misrepresented the risk. Let me illustrate.
Imagine setting up a credit risk profile. And in that profile you have different risk groups. You would have the people with the best credit, and then you have people with ok credit, and then unknown risk credit.
Take these risk profiles and apply some statistical analysis where 99.9999% of the people in the best credit pay their loans, and 96% of the people in the unknown risk pay their loans. A bank could then say if they have unknown risk loans on their books 4% will go belly up. Thus people in this risk profile have to pay for those that do belly up. In real life you know about this by your credit score. You know that the lower the credit score you have the more you have to pay.
The problem is that Statisticians have repeatedly said that statistics is for telling you what happened in the past and not what will happen in the future.
The quants created elaborate structures and instruments based on the 4% default rate with some play for error. When the defaults go beyond this boundary the structures collapse and due to the leverage causes a domino effect.
What happened is that as the prices of real estate went up more people wanted in and more people misrepresented their backgrounds. Thus people gamed the statistics and threw the models into a tailspin. After all it is not statistically possible to all of the sudden have everybody seem to be a millionaire.
Will the consumer suffer and end the consumer?
I actually think the consumer will pull this market out of the doldrums. Up to now it has been the hedge funds, investment banks and so on playing games with the markets. Now with the investment banks and hedge funds being squeezed we will get back to fundamentals.
Did we not go through this with LTCM?
For those wondering about LTCM please go to wikipedia and read it. And the answer is that yes we went through it with LTCM. The problem is that the quants still managed to convince enough people that their system worked.
Statistics do work, until they don’t work. To understand that you need to look at Taleb’s work "Fooled by Randomness" or "The Black Swan". I myself use statistics and probabilities when doing calculations. And I do the exact same thing as the quants. Though I like to keep my greed and risk profile in check.
Of course you could argue that, "Christian that is what the other quants said." You are right, and time will tell, but as I said statistics work so long as you are aware that things can go awfully wrong.
Is this the end of the financial system?
No, not at all. Anybody who yells and cries that the financial system will collapse does not understand the financial system. Those who participated in the risk will have problems.
I would actually argue that we will get back to normal. I think finally commodity prices will fall because those investment banks and traders that drove up the prices will have no money. Now the price of commodities will reflect the true demand. We will not get 40 USD oil, but I could easily see 80 USD oil. And that would be good.
Monday, Sep. 15, 2008
by Christian
In the fall I am giving a class at a conference that is an introduction to financial engineering for software developers. I have talked to my clients, and talked to people at the IB I work at.
Yet all of their answers results in what could be called statistical insignificance. So I thought, why not throw it out to the readers. If you were to attend a talk called Introduction to Financial Engineering for Software Developers, what would you expect to hear?
I don’t want to give any ideas since ideas lead you down certain paths…
Friday, Sep. 12, 2008
by Christian
The question is if Fanny and Freddie is the right action at the right time or if it is socialism? Many like to say hey this is an act of the USSR or what have you.
Let me give the perspective of a non-American. Though let me give you the perspective of somebody who likes America, has American friends and is pro-American.
(more…)
Wednesday, Sep. 10, 2008
by Christian
