Archive for September 2008

No one if forcing Nomura to pay those bonuses…

September 30, 2008

Nomura to match Lehman’s ’07 Asia bonus pool-sources | Industries | Financial Services | Reuters

except their ability to retain people. A large chunk of Lehman’s assets is the employees.

Worthwhile to keep in mind.

You might say

September 29, 2008

that bankruptcy simply speeded up things that were going to happen anyway.  But who knows for sure?

CrossingWallStreet.com: Should Lehman Have Been Allowed to Fail?

There is pain coming.  The question is how much.

I now wonder about the national accounts identity: Savings=Investment, although my thoughts are still confused.

I now believe for that ex-ante, bailing out, or even the possibility of bailing out was a bad idea, unless the bailout rules were crystal clear.  We have deposit insurance for banks.  But that comes along with capital requirements.  Of course the government has implicitly said that bailing our mortgages was a possibility all along… 

I am discouraged that many people seem to be forgetting that the majority of subprime mortgages are still being paid back.  And that not all the risky loans were to poor people.  And the problem was the re-levering of the loans, not who the loans were made to.  We are going to live with the effects of current events for a long, long time.

Nice essay

September 29, 2008

Here is why you need to learn the theory of statistics:
Edge: THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS By Nassim Nicholas Taleb

Also why the statement ‘Assume that everyone knows the state space’ is a bit tricky.

And my last post

September 28, 2008

makes me even more cynical about who the winners are losers are. The winners are those who gambled on a bailout, but writing more CDS and buying junky mortgage CDOs

A risky bond plus CDS = a risk free bond,

September 28, 2008

If you have a risky bond and buy cds, then ignoring counter-party risk, you have a risk free treasury bond. That means that selling credit protection (selling CDS) is just like borrowing money to invest in a risky bond. So, people selling CDS (AIG) were borrowing money to invest in risky bonds. Once the risky bonds turned bad, leverage is going to screw you. Hence AIG.

The giant CDS number being bandied around is overinflated by at least a factor of two and most likely much more. If I buy insurance on $1 worth of bonds, then it is counted as CDS on $1 of bonds by the buyer and CDS on $1 of bonds by the seller for a total of $2 in notional. Double counting. And if the seller hedges by buying insurance or CDS someone else, it is counted yet again. No one really knows the size of the market.

And even so, the value of the insurance is not $1 per $1 of bonds insured, but much, much, much less. For example, if the bond has a face value of $1 and an equivalent risk free bond should sell for $1.05, then the CDS is worth 1.05-1.00=$0.05, not $1. Bu it is measured as insurance on $1, and that is the reported number. So take those giant numbers with a grain of salt.

God knows why we did not have centralized clearing systems for these contracts, so that all counterparties would know those numbers. Someone is going to end up really rich out of all of this-likely people who have been writing CDS in the last few months.

Food for thought.

September 26, 2008

Why is capital frozen?  And are there really no ‘good deals’ in these distressed securities?  I am not sure I agree with one-off bailouts, though.  I would prefer some concrete, predictable, and credible policy of what will be bailed out and what won’t be: rules, not discretion. 

Bailouts Are Painful – And Should Be – Seeking Alpha

Agreement, again

September 25, 2008

Interfluidity :: JPM, BOA, and Citi: The new big three