Finance Addict - Latest Comments

Re: Economic solutions from the “private sector”

reformedbroker — Thu, 21 Jun 2012 13:36:34 -0000

GOOD POST, THANKS FOR MENTION

Re: Have we arrived at a financial singularity?

Jay — Wed, 13 Jun 2012 09:48:09 -0000

This isn't exactly uncharted territory.

It was a general principle of the Soviet Union that everyone was guilty of something. This functioned, in practice, to concentrate power into the hands of the people who decide which crimes to investigate and punish (notably the KGB).

In a similar manner, if two parties have each signed a bundle of derivatives contracts, and those derivatives contracts cannot realistically be understood by any judge, then power is in the hands of whoever can afford the best lawyers.

Think of the foreclosure crisis. Banks have widely screwed up their securitization paperwork in ways that are unremediable under New York trust law, but people lose their homes to forclosure anyway. Only a few judges have smacked down banks for their screwups, and these screwups are relatively simple and unarguable.

Long story short, when the law gets too complex to apply fairly, it gets applied unfairly. Equality before the law takes a dirt nap, and the law favors whoever can afford the best legal technicians.

Re: Have we arrived at a financial singularity?

Daw6201 — Wed, 13 Jun 2012 09:36:36 -0000

Just change the laws so that investment banks can no longer be public corporations, make them go back to partnerships. If you personally lose everything when one of the exotic investments you do not understand blows up, you will only make investments you understand.

Re: Have we arrived at a financial singularity?

Stephen Hearn — Tue, 12 Jun 2012 22:41:30 -0000

What would the motivation for a public company to give complete transparency on it's financial structure when reporting is already a hassle.
The assumption that the financial markets are too complex to understand is ridiculous. No one can understand all of the complex derivative and credit rating systems by themselves, but that's why fields have respective experts who more often than not, can outclass any CEO in their respective field of expertise. We see a collapse in this understanding when people overstretch their hands.
What was the quote, "Man's reach exceeds his grasp"? That happens occasionally, but overtime I think these financial instruments have proved that they are bound by the same rules that they were originally created with.

Re: Have we arrived at a financial singularity?

Eeddccbb — Tue, 12 Jun 2012 21:41:29 -0000

The problem is that nobody has ever understood how financial markets work. The difference now is that the institutions no longer need to, because there's explicit backing in the form of taxpayer funded bailout - in effect the legalization of theft-by-gambler.

Re: Have we arrived at a financial singularity?

The Chinonomist — Tue, 12 Jun 2012 18:09:12 -0000

You got it. The implication is that their astronomical size (as big as all US banks USD assets combined) coupled with the need to sell in a fire sale scenario, and the interconnectedness in the world economy through international trade create the conditions for a "Dragon King" event (in the terms defined by Sornette). I really don't want to be an alarmist, but things do not look pretty... at all.

Re: Have we arrived at a financial singularity?

Finance Addict — Tue, 12 Jun 2012 16:22:31 -0000

whoa -- this one is pretty sweeping in scope. very fascinating. this point stood out to me: "no amount of physical/fiat money (utility) can replace trust." Trust has been ebbing out of the financial markets for the past few years now and Edelman ( http://financeaddict.com/2012/... has
documented what we all sense: people no longer trust the institutions of the past. Every new development in Europe and every instance of gridlock in the U.S. (to name but two examples) vindicates this. An environment of widespread societal distrust as the background to a too-complex-to-understand financial system now worth many times more than its underlying real economies? Sounds like a recipe for fun.

Re: Have we arrived at a financial singularity?

Finance Addict — Tue, 12 Jun 2012 15:59:49 -0000

thanks for this! intrigued by the point you made about assets denominated in USD held by foreign banks. what do you think is the implication of this? for example, what might happen if the foreign banks need to offload these in a fire sale scenario? or are you thinking about something else?

Re: Have we arrived at a financial singularity?

The Chinonomist — Tue, 12 Jun 2012 13:31:59 -0000

I characterize this under Didier Sornette's definition of a Dragon King event.
http://thechinonomist.blogspot...

Re: Have we arrived at a financial singularity?

Da55id — Tue, 12 Jun 2012 12:51:13 -0000

This article directly addresses financial singularity:

http://seekingalpha.com/articl...

Re: Have we arrived at a financial singularity?

Finance Addict — Tue, 12 Jun 2012 12:49:05 -0000

thanks for this. of all officialdom, Haldane seems to grok it most.

Re: Have we arrived at a financial singularity?

Finance Addict — Tue, 12 Jun 2012 12:46:27 -0000

I hear you and I also get how Soros' ideas on reflexivity make things even more complicated. But surely there's something to be done with the vast amounts of data already being spit out by the trading, credit and who-knows-what-other systems already at work in finance. Right now their output is kept in walled gardens, we need to slice it open, rip it out and hold it up to the light. Such a hivemind system would always run behind, but maybe only a few months behind as opposed to a year or several years behind, which is where we seem to be today.

Re: Have we arrived at a financial singularity?

Finance Addict — Tue, 12 Jun 2012 12:32:37 -0000

Thanks for this, and for hipping me to the Resiliblog. "Qualitative easing", eh? Also the larger point about debt/equity swaps on a national scale brings to mind recent comments that Willem Buiter, Citi's chief economist, is reported to have recently made (see http://www.ft.com/cms/s/0/74f3.... The following is a quote of someone else's hearsay:

"Overall outlook: advanced economies need mass debt to equity conversion. Household negative equity becomes bank equity. Sovereign debt converts to GDP warrants"

How we get to this point is the question. Hang on tight. Or not. Maybe hanging on too tightly has been the problem.

Re: Have we arrived at a financial singularity?

Onit2007 — Tue, 12 Jun 2012 07:08:38 -0000

http://www.bankofengland.co.uk...

Re: Have we arrived at a financial singularity?

Richard — Tue, 12 Jun 2012 06:08:38 -0000

It can't be done.

I refer you to the "three body problem" in physics. It's very difficult to compute, and its universe is only stuff that moves around in individually predictable ways, unlike entities in the market. The market is like an n-body problem, except the attributes and existence of each body changes minute by minute, often directed by the whims and fancies of politicians and voters.

Try to have the setup govern kinderschool behaviour first, then ramp up to the market.

Re: Have we arrived at a financial singularity?

Chris Cook — Tue, 12 Jun 2012 04:38:38 -0000

Rather than simplifying the institution, maybe we could simplify the instrument.

Perhaps we could re-visit - and re-invent in modern form - financial instruments which pre-dated the banking system.

https://blogs.ucl.ac.uk/resili...

We might begin by looking at new variants on the financial instrument known as 'stock' - which is actually distinct from shares in joint stock companies traded today - and realise that the origin of the phrase 'rate of return' had nothing to do with a fixed rate of interest and everything to do with the potentially variable rate at which stock could be returned to the issuer.

So maybe it's 'Back to the Future' in what the excellent Ms Tett once described as a 'Flight to Simplicity' by a new approach to financing and funding through direct 'Peer to Asset' investment in streams of value created by productive assets.

Re: Did Lloyd Blankfein just call the top of the tech bubble?

Finance Addict — Thu, 26 Apr 2012 16:47:04 -0000

As in, cash looking for a place to nest in the face of persistently low interest rates in many of the biggest economies? That's certainly a part of it.

Re: Did Lloyd Blankfein just call the top of the tech bubble?

linhares — Thu, 26 Apr 2012 14:18:58 -0000

It's a currency meltdown

Re: Norway’s new move — what does it mean?

Finance Addict — Wed, 04 Apr 2012 16:33:00 -0000

Great question re the SS Trust Fund. I'm guessing its exclusion comes from its very lack of adventuresomeness, as you put it. The others in the list have quite a bit more latitude in what / where they can invest whereas, as you rightly mention, the SS Trust Fund is restricted to old US government issued & g'teed securities. Where's the fun in that? (Although, I'm not terribly keen on SS getting all Norwegian with my old age money.)

The Sovereign Wealth Fund Institute includes France's "Strategic Investment Fund" on its list, which they say is managed by the CDC. At $28 billion it comes in at #25. The list is pretty interesting, have a look!<http: fund-rankings="" www.swfinstitute.org=""></http:>

Re: Norway’s new move — what does it mean?

guest — Wed, 04 Apr 2012 05:53:43 -0000

Isn't the SS Trust Fund (measured in the several of trillions USDs) the Largest SWF as well as being the most transparent? Of course it is the least adventuresome (owns just USTBs) but in comparison to Germany which runs on a pay-as-a-you-go, it warrants inclusion. Also surprised not to see France's CDC...

Re: Bernanke: the man, the legacy and the law

Finance Addict — Fri, 23 Mar 2012 11:04:28 -0000

I agree with you on the Fed action fulfilling the condition re “unable to secure adequate credit accommodations from other banking institutions.” This is worded very broadly and can be broadly interpreted. I'm less sure about the "loan" vs. "asset purchase" question. Was it a "loan" in name only if its pre-determined purpose was to specifically and exclusively purchase illiquid securities? Also, what about the fact that the "loans" were made, not to the party "unable to secure adequate credit accommodations" but rather to a specially created, arm's length SPV?

Re: Bernanke: the man, the legacy and the law

Guest — Fri, 23 Mar 2012 10:17:08 -0000

Interesting points are raised, but I think the Fed was on legal grounds. First many "purchases" that are reported in the news are realy repos (repurchase agreements) which are considered to be loans - thats what got Lehman Brothers in trouble with the "repo 105" scam when they tried to book repos as sales and not loans (thus moving assets off their balance sheet).
Second, one of the main questions raised by the Penn study is whether the SPVs really had no access to the lending markets (thus violating #3 above). I think the answer to this is a simple yes since the reason Bear collapsed in the first place was a run on the bank and loss of short term interbank lending. This only got worse as time went on. It seems highly unlikely that a SPV trying to get funding to aquire the very same assets that were being offloaded at firesale prices would have much luck in the market... hence the need for the Fed to act as a lender of last resort. Thats the difference between the Fed now and during the Great Depression.

Re: Government’s role in the subprime crisis

Finance Addict — Tue, 20 Mar 2012 00:59:32 -0000

To expand on my Twitter comment, if the GSEs are guilty of anything than it seems to me to be more a halo effect of their general, gargantuan role in the housing market. (A role that's being greatly debated.) If I had to describe it in my own words I'd say that the GSEs have two missions: (1) to give broad support to the housing market and (2) to encourage the fulfillment of narrow goals around providing affordable home ownership to minorities and low-income support. The research paper hones in on goal 2, but goal 1 certainly had a lot to do with the general carelessness seen in the market.

I agree: the researchers do take a very narrow focus and this is an interesting counterpoint to the similarly narrow focus of observers who swore that there had to be a direct link between affordable housing goals & subprime. (And who may well continue to think so, despite this evidence to the contrary.)

Re: Government’s role in the subprime crisis

David_Merkel — Mon, 19 Mar 2012 23:19:11 -0000

"Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates."

That is the relatively limited finding of this paper, which examined two hot markets during the worst of the origination. It doesn't mean that by providing a ready market for Subprime RMBS, the GSEs did not add to the crisis. It also does not mean that the GSEs did not add to the crisis by guaranteeing more & more debt against housing which with easy monetary policy, led to overborrowing against housing, helping to create a speculative bubble.

Don't get me wrong, I have not been in the camp that says the CRA or affordable housing mandates drove bad lending. I do think the GSEs played a moderate role in the crisis, mainly through facilitating too much seemingly normal lending as house prices rose too rapidly. Same for the Mortgage Insurers and Home Equity Lenders who allowed deposits to drop to minuscule levels.

There's a lot of blame to go around in the financial crisis, I think the GSEs deserve some of it, but they don't get star billing either.

Re: Government’s role in the subprime crisis

Finance Addict — Mon, 19 Mar 2012 17:00:01 -0000

Indeed, some of the researchers' results support this theory, proving that a loan made to a borrower with income less than the median income in the Metropolitan Statistical Area was 2% less likely to default than one that did not qualify for Fannie / Freddie's income goal.