Thursday Aug 06, 2009

Clunkers and Financial Institutions

Cash sent to financial institutions corrects ("fills" gaps in) balance sheets to improve credit-worthiness and loan-giving capabilities. "Cash for Clunkers" removes depreciated assets prior to their end of life, generates demand and creates economic pull throughout. Small actions at points of leverage can produce much larger effect than much larger actions at other points.  

Monday Sep 22, 2008

Profit and Leverage

Jon Hilsenrath, Damian Paletta and Aaron Lucchetti, "Goldman, Morgan Scrap Wall Street Model: End of Traditional Investment Banking," The Wall Street Journal, Sept. 22, 2008:

The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Monday Sep 15, 2008

Avoiding "Moral" Hazard

In a credit crisis, the "lender of last" will weigh options, now having to balance the desire to provide liquidity versus its desire to ensure market dynamics ("Credit Crisis Strains Government's Options," WSJ, Sept. 12, 2008):

Officials are also acutely aware of the problem of "moral hazard." Bailing out too many firms, the reasoning goes, would encourage more risk taking in the future. That makes officials reluctant to be seen as rescuing another institution. The Fed made a $29 billion loan to help J.P. Morgan take over Bear Stearns. It's not clear that it would be willing to do that for another firm.

Treasury Secretary Henry Paulson has said that institutions must be allowed to fail and that markets can't expect the government to lend money or support every time there's a crisis. "For market discipline to constrain risk effectively, financial institutions must be allowed to fail," Mr. Paulson said in a speech in July.

Tuesday Nov 13, 2007

Wars' Cost

Josh White of The Washington Post summarizes the findings of "The Hidden Costs of the Iraq War," a report issued by the Democratic staff of U.S. Congress's Joint Economic Committee. I do not believe the cost analysis takes account of the immeasurable human toll involved.

If, instead of a dogged focus on imperial goals powered by fear, people demanded that this money be spent, prudently, on making U.S. economy more competitive, i.e. if they demanded that government-driven investments be focused on people, institutions, facilities and technologies that help people get on with their lives, work and play, the U.S. would not be facing the economic problems it is facing now and will be in a much better economic, political and social position globally.


Monday Sep 17, 2007

UK Bank Run or the Advantage of Reading Two Papers

I subscribe to two papers that are delivered every morning at my doorstep: The Wall Street Journal and Financial Times

For three days now, Financial Times has carried stories and pictures of a bank run in the UK, involving Northern Rock, a financial institution focused on savings and loans geared to the mortgage market. (Some have argued that if there's only a single bank run, we do not have a bank run. However, financial crisis have their own way of diffusing to neighbors.) This morning, FT carries, above the fold, a 1/4 page picture of a crowd waiting to withdraw their savings from a Northern Rock branch. Cambridge - Customers of Northern Rock waiting patiently to withdraw their savings.

No two industrial economies or countries are as intertwined as the UK and the US. Yet, if you read The Wall Street Journal this morning, you would hardly notice anything going amiss in the UK. On the front page, the news of the bank run is reflected only in a two-sentence paragraph falling on the fold, making it hardly visible, with a jump to page 3 of section C ("Money & Investing"), a section which bills an educational piece on yield curves on top of its own fold. On page C3, two short columns summarize the least salient parts of story, with no mention of a bank run.

I should end this by noting that the electronic version of FT, accessible here in California, has no images like the ones in the print edition on its front "page" today. However, one can find relevant images on Flickr -- like the one I've posted here.

Wednesday Aug 29, 2007

Diffusion of Financial Crisis among Economic Neighbors

In the last several months, as the credit crisis has rippled from the U.S. to Europe and back, I'm reminder of other historical examples:

Princes, abbots, bishops, even the Holy Roman Emperor debased the subsidiary coinage used in daily transactions (but not gold and silver coin of large denominations) by raising the denomination of existing monies, substituting baser for good metal, or reducing its weight, in order to extract more seignorage in the absence of effective tax systems and capital markets--this to prepare for the Thirty Years' War, which broke out in 1618. Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring principalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. The territorial unit on which the original injury had been inflicted would debase its own coins in defense and turn to other neighbors to make good its losses and build its war chest. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, "Ivan the Fool."

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th edition, p. 121, John Wiley and Sons, Inc., New York (2000) 


Wednesday Jul 25, 2007

FY'07 Financial Results

Jonathan Schwartz, the chief executive officer of Sun Microsystems Inc., explains how Sun intends to publish its FY'07 financial results on Monday, July 30. (Note his comments about the use of web for fair disclosure.)

Find the summary here.

Wednesday Jun 13, 2007

Money Supply

Despite the recent correction to the falling prices and rising yields of U.S. treasuries, I've been wondering how the Federal Reserve might react in the coming months as the bond market remains jittery. The talk to beat inflation was tough when the new chair took his place. However, if money is tightened to reduce inflation, interest rates will have to rise even more, furthering the slump in the housing market already suffering from the recent subprime melt-down. This course of action will lead to serious unhappiness among those owning property. If the Fed decides on merely talking about beating the inflation while letting money loose, interest rates will remain less volatile and inflation will rise but perhaps at a slower rate than would cause a shock. If I were to bet, I would bet that the Fed will choose the latter coure of action. It is the politically "prudent" course although many who earn wages and have little property to own may suffer more than others.

Wednesday May 23, 2007

More CFA Examinees in Asia

Chartered Financial Analyst (CFA) designation has become a license to work in financial services anywhere in the world. Its appeal goes global with the globalization of financial services.

More people will sit for the CFA exam in Asia than in the US this year, some 52,900 as compared to 45,400, Financial Times reports this morning. CFA examinations began in 1963.  Originally for analysts, it has become popular with asset managers and traders. Only half the candidates have traditionally passed the test.  The rest "dop out during the course, which typically lasts four years.

Sunday Feb 18, 2007

CDOs and Default Risk

Elsewhere, I follow the recent instabilities in the collateralized debt obligations market, and in particular, the segment involving mortgage-backed securities.

Friday Feb 16, 2007

Mortgages and Repurchase Safeguards

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Not only subprime lenders but also most other lending institutions package and sell their mortgage loans to investment banks who often slice and dice these loan pools to issue mortgage-backed securities of varying risk levels. Occasionally, as HSBC seems to have done with some loans, the bank may keep these loans on its own books.  This is a very risky proposition. However as was also the case with subprime loans purchased by HSBC, most investment banks purchasing these loans include repurchase clauses in the mortgage pool contracts. After adding $1.76b to bad debt costs, HSBC has sued some subprime banks who have failed to abide with repurchase clauses. (See "Mortgage Hot Potatoes: Banks Try to Return High-Risk Loans To the Originators," The Wall Street Journal, Thursday, February 15, 2007. page A4.)

In economics, such repurchase clauses are called transaction "safeguards," which if set correctly, will lead to a better hybrid transaction model. They discourage subprime lenders to take unreasonable risks and put them in a risky position if they do take extreme risks. The investment bank purchasing the loan pool may at any time (coinciding with a trigger, perhaps) want to exercise the repurchase option.

Wednesday Jan 10, 2007

Patents on Financial Instruments

Many investment banks have filed U.S. patents on concepts for financial instruments, these patents have been filed on a vareity of instruments from derivatives to Islamic asset-based investments. Apparently such financial patents are not granted in Europe. It may be clear to some that if an instrument has a great market power, its exclusive availability to one firm can lead to particular instabilities when combined with unavailability to other firms of counter-instrument sor balancing instruments or instruments that "bet" in the same direction. This is a hypothesis worth studying but I think the investigation would be quite subtle and only simple cases can be modeled. Even so, the study of such cases can be illuminating. Economnic efficiency models suppose multiple actors capable of taking parallel actions to make corrections to market swings. Perhaps that story was simply what it was: a simple fiction.

Friday Nov 24, 2006

Mr. AI or Mr. Market

So, has Mr. AI any advantages (other than speed, which may cause some self-defeating dynamic instabilities) in comparison to Mr. Market when it comes to voting for stocks? Or will it be any better than a good investor when it comes to weighting the value of stocks?

In general, Mr. Market represents the leveled investing masses roaming the market. There is nothing they do that has any special upside. The good, contrarian investor takes care to stand judiciously apart from such masses.

A given AI algorithm can hardly be said to be any better than any other (composed with the same level of parametrization). If anything, a large number of these algorithm, including neural networks, Baysian belief nets, Markov models, Guassian classifiers, fuzzy ones, etc., are intelligence-equivalent for most practical purposes. Their marginal advantages (in speed and parametrization) when used for leverage can amplify value impact of common investment risks and "errors" just as they may find interesting points in the market for leverage.

So, in the final analysis, while Mr. AI may even choose random rules for analzsis, it will most probablz remain an unrully side-kick of the good investor.

Wednesday Nov 08, 2006

The Archeology Of The First Internet Bubble

In his Wall Street Journal "Portals" column ("The Dot-Com Bubble Is Reconsidered," Nov. 8, 2006), Lee Gomes points us to an archeological study of the Internet bubble, some of whose findings contrast with conventional wisdom regarding the boom which is "normally dated from the Netscape IPO in August 1995 to March 2000, when Nasdaq peaked at above 5100": 

A recent paper suggests that rather than having too many entrants, the period of the Web bubble may have had too few; at least, too few of the right kind. And while most people recall the colossal flops of the period (Webvan,, etoys and the rest) the survival rates of the era's companies turns out to be on a par, if not slightly higher, than those in several other major industries in their formative years.

The paper is being published in a coming issue of the Journal of Financial Economics. As noteworthy as the findings are, even more interesting is the process that led to them. The work is an outgrowth of the Business Plan Archive at the University of Maryland. Its goal is to become a kind of Smithsonian Institution of the Internet bubble, saving for posterity every business plan, PowerPoint presentation and venture-capital term sheet -- the more frothy and half-baked, the better -- that it can get its hands on.





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