Are you in Detroit?
There is no total collapse here, lights are still on, food in the stores, jobs to go to (and I work in manufacturing, you know, the thing we no longer do in America).
I’m pretty sure the context here is more along the lines of a stipulation, an agreement to accept something as a given. As such, it carries no implication of condescension or belittlement, simply a rhetorical device much like saying “Let’s assume”.
And I’m pretty sure you knew that.
Ah yes, an ‘expert’ who seems to know jack shit about his own field, blaming a worldwide real estate bubble on Fannie and Freddie and the Community Reinvestment Act of 1977. Expertise like that I can get directly from Rush Limbaugh and Fox News, rather than having to get it filtered through some bozo on a message board with an inexplicably high opinion of himself.
Reminds me of the good old days when Weirddave used to refer to himself as ‘an historian’ (I always loved the ‘an’) on the strength of a bachelor’s degree.
I’m perfectly willing to accept Scylla’s claim to be a financial expert, and a member in good standing with the financial expert community. My question is more along the lines of why do these people get paid. Get paid rather well, point of fact. Get paid more than a teacher, a fireman, a truck driver. Much, much more.
The response from that community seems to be along the lines of “Hey, shit happens! Nobody saw this coming.” That appears to be true, according to the research I cited above, only a very small handful of financial experts sounded a warning. They spread a picnic lunch on the railroad tracks, and nobody felt the tracks vibrate? Heard the train whistle?
Well, except for Goldman Sachs…
http://www.nytimes.com/2010/04/25/business/25goldman.html
Apparenly, somebody there had a clue.
Has the financial industry gone the way of physics, from solid Newtonian predictability to the never-never land of quantum finances? Have we arrived at a place where real expertise isn’t even possible?
By the by, found that quote I referred to earlier. Here’s you:
Here’s naive, dumb-ass me:
Shortly thereafter, you decided that the intelligent part of the debate had ended, and you drifted off.
http://boards.straightdope.com/sdmb/showthread.php?t=510410&highlight=leverage&page=13
Posts 640 to 645
So, when did you find out about this? When all the rest of us did? I know what my reaction was to the news of 40 to leverage, its on record. What was yours? What was the reaction of your peers? Nobody said anything about it to you, none of the journals, none of the business press?
Somebody must have known, yes? That what had previously been regarded as an insane risk was now kosher? Well, OK, what did you think about it, when you found out?
Luce:
You’ve asked and I’ve answered this same question. Several times already.
Maybe sitting in a trailer, smoking pot and typing the same thing over and over appeals to you. That’s fine.
Let’s further the discussion:
Since your happy to dig around in old posts, why don’t you cut and paste the last 8 times you asked essentially this very same question in this thread and my reply?
Than, when we have that in front of us you can tell me what it is that compels you to reask the question every 20 posts are so.
Ok?
That shows a significantly different #, and, it’s a notional value.
Oh, that’s easy! That you never actually answer the question. You have a lot to say about my habitat and my habits, which you clearly think is relevent. Or, more likely, you seek to evade the issue by attacking the messenger.
And be sure to note, your personal integrity is not the issue. I accept that you are telling the truth when you say you didn’t know. I also accept that you are an expert in your field, which apparently is so narrow a slice of the financial world that you are as ignorant as the rest of us when it comes to stuff like this. Your claim is sort of backed up by others, apparently almost nobody knew anything. A vast conterie of highly paid experts, and nobody knew jack shit.
See the problem? Trust isn’t simply a question of honesty, there is also the question of competence. When, for instance, did you find out about this…rather remarkable…leverage of 40 to 1. Now, my reaction, being the naif that I am, was WTF?! Yours? People ask your opinion, yes? You are paid for that opinion. Well, what was your opinion?
And going forward, who, in your estimation, acted responsibly and intelligently? And I mean that in the fiduciary sense, of people entrusted to care for other people’s money. If this vast coterie of experts were ignorant, I would be inclined to forgive, forget, and never trust them with another dime. If they were dishonest, I am in favor of seizing them by the ankles, dangling them upside down and shaking them until very dime falls out their pockets.
Is there anyone, in your estimation, who acted both intelligently and responsibly? Keep in mind, there are several questions here, if you only answer the one you like the best, you haven’t really answered. I can probably get somebody else to ask these questions, if drug-addled trailer trash are beneath your dignity. I’m not burdened with dignity, so its not an issue for me.
Bullshit. This is why I asked you to quote the last eight times you asked this question and my responses. Since you can’t bother to do that, I assume you are not serious and ignore the rest of your bullshit.
And, it’s not that you are not worth my time because you are drug added trade trash it’s that you are not worth my time because you keep asking the same insinuating questions over and over again, while ignoring the answers.
You might have to explain why this matters further. I understand that in general the phrase “notional value” means the value from which the ongoing payments of a financial instrument are calculated, and that the value of the notional amount need not actually change hands in the case of a swap.
However, my understanding is that a credit default swap’s notional value DOES change hands if the reference bond defaults.
For example, I buy a CDS from you on some arbitrary bond issue. That CDS has a face value of $10,000, and I pay you some amount of money per quarter for it, denominated in points on the face value. The notional value is $10,000, but the actual market value may well be pennies. However, the instant the bond issue defaults, you are on the hook to me for that $10,000.
So, considering I don’t have to have any interest in the actual reference bond to buy a CDS, three things follow from all that:
- An arbitrarily small number of bond issues can support an arbitrarily large number of CDS instruments.
- If enough of those CDS are purchased against the same small subset of considered-stable bond issues, a tiny segment of the reference bond market defaulting could have a disproportionately gigantic effect on the economy and financial sector as a whole.
- Even if the actual market value of a CDS is tiny compared to the notional value in the non-default state, in the default state the notional value is owed as a payout by the issuer.
Feel free to correct anything wrong with this analysis, as the entire concept of notional value of an instrument as I understand it seems a rather odd way to talk about something that’s effectively insurance.
Z:
That’s pretty good. The main issue I will take is with #2. It’s. It that you are wrong, it is just that it can be more complex. Realize that some of those CDS instruments offset each other.
Also, writing insurance while not being long the bond isn’t necessarily irresponsible. The question isn’t whether you are long the bond, but whether you have the financial wherewithal to cover the debt.
This is the classic problem with insurance. For example MBIA insured municipal bonds. If a municipal bond went bad, no problem. It was built into their models and assumptions and they could cover it. What they could not cover is if a large proportion all went bad simultaneously.
The difference between a particular bond going bad and all bonds going bad is the difference between specific risk and market risk.
Most buyers of CDSs know and knew that they are good protection for specific risk but worthless for market risk. So, to me, the idea that these things didn’t work to mitigate market risk isn’t surprising.
What was really surprising was to learn that default risk could actually be a market risk.
That feels odd to me to phrase it that way: since there’s not really an analogue LONG position one could take on “will this bond default”, there doesn’t appear to be any way to set it up so that two CDS are betting the opposite ways on the same bond issue.
Unless you’re talking about a company that sells CDS offsetting it by buying a CDS on a related bond issue, such that if one defaults the other is likely to as well.
When I hear the term “offset” in this context, I envision it as taking a long and a short position on the same stock, which lowers (greatly) the potential profit but also mitigates a large bit of the risk. What exactly do you mean when you’re using it here?
Part of the problem for us outsiders is that seems fairly unsurprising to me; there’s been a feeling around the water cooler and dinner table in Z-land for a while that securities ratings were being inflated and/or gamed–certainly since my dad lost a fair chunk of his life savings in the dot-com bubble (which isn’t terribly related, except as a pointer to the last time poor predictions were made by the venture capital set).
Luce:
Nothing?
You know I went back and I stopped counting after I found you asking me basically that same question eight times. I don’t exagerate. I also looked at my answers. I have reasonalby answered your question several times. Most of the time you’ve simply ignored the answer and then just asked the same question several posts later.
Seeing as you’ve done this, and made yourself a pain in the ass this many times, I’m not inclined to drop. Obviously this is an important question to you to ask it so much. So please, go back and cite each time you asked me, and what my reply is so that we can determine if and what is deficient about it my answers
If you don’t want to do that I will assume you were just being a douchebag for the sake of being a douchebag, or more likely that you’ve been smoking so much weed for so long that you generally have a memory issue.
So stop being an asshole and get to work. Because if you are just going to be an asshole, I’ll console you to the troll bin with RTF.
Because really, you aren’t worth my effort.
There is. There are all kinds of ways ranging from relatively simple to really really complex. They just involve leverage and derivatives.
I’ll give you a simple example. I have 10k. Since treasuries are considered to be pretty safe I, as an individual can leverage them up so that I can by 90k of treasuries with 10k down and pay interest on the other 80k. Now let’s say I bought 10 year treasuries paying 2%, and I’m borrowing money at 5%. I’m losing 3% on this deal, so why am I doing it? Maybe I think that interest rates are going down and bond prices are therefore going up, and if they do so the value of the treasuries should increase from 90k to 100k, which would mean that I would double my original investment of 10k.
So, right now I’m speculating but doing nothing to insane assuming I can absorb any reasonably loss. I’m speculating on interest rates, but I also carry credit risk. What if the treasuries go bad? So, maybe I invest a couple of hundred bucks in a treasurey CDS to cover my base in case Congress does something stupid and I end up on the hook for 80k, because that risk I’m not willing to take.
Now, in this simple situation, I started with 10k I bought 90k worth of treasuries and bought 90k worth of CDSs. We now have a total notional value of 180k. This is 18x leverage for those of you keeping track.
Now, all sorts interesting things can be done from here, if this isn’t enough for you. I’ll give you an example or two that an institution can do. Let’s say I’m not happy losing 3% on the float while I wait for my interest rate bet to work. So, what I do is I strip my 90k of treasuries, breaking them into two pieces. One piece is the piece I care about, now a zero coupon treasury that will appreciate if interest rates drop. The other is 10 years worth of interest payments on these 90k of treasuries. That’s going to take 10 years is 1,8 to that cash flow, but I don’t plan on holding my bet that long, but I need the money to pay the interest now. Over ten years that is $18,000 worth of interest, or $1,800 a year. My carrying2 cost is $4,000 a year. So, what I do is I sell my my $18,000 worth of interest over ten years for a discount to face value now. Let’s say I get $10,000 for it. Now i have enough money to carry my bet for 2 1/2 years.
Now, let’s look at the buyer of those stripped coupons. What does he have? He kind of has a reverse CDS, doesn’t he? He gets a big payment each year that the Treasury does not default for ten years, but than he never gets any principle. Now you can bundle these an leverage these and break them up into little pieces and make derivatives out of them to make them even more specific.
That in a nutshell is how you do it. You can get much much more complex.
No, but good thinking. You can do that kind of thing too. If a buyer of a CDS thinks the price for the one he is long is too high he might by one cheaper for another issue that he thinks is linked. The writer can do these kind of arbitrage plays too (not true arbitrage, but it goes by that name)
Pretty much the same thing. Sometimes you may do this because it may not be feasible or it may be too expensive to unwind or sell a contract and it’s cheaper to close out the position by buying an offsetting position. Such a set of transactions may have a high notional value, but it’s real value was fixed the moment it was offset and it’s affect is exactly 0.
I think that happened, but that wasn’t what I was referring to. What I am referring to is something a bit more scary. To wit:
Generally speaking, if you wish to responsibly evaluate a bond, you do so based on credit risk. Zeriel borrows 10k. What is his ability to pay it back? How much collateral does he have? How much does he make? How safe if his job? How responsible is he with his money? How leveraged is he? We can answer these questions quantitatively and make an accurate representation of your credit risk.
Or so we thought. But, we were wrong.
There is other risk which is called market risk. If there is a market for Zeriel bonds, and bonds of everyone else like Zeriel, and that market crashes than I might not be able to sell your bond for what I paid for it, right?
From a credit standpoint why should I give a shit? If I just plan on holding your bond, I don’t care about market risk. I just care about your ability to pay, right? Fuck the market. You are a good and trustworthy borrower. I know your credit is good.
Except what if the market really crashes, like for some reason it lose 90% of its value? Maybe you borrow money every month to buy raw materials to turn into product, maybe you don’t think about it as borrowing because you think you are paying cash. But really. You get your raw materials. Your supplier sends you a bill, and you pay the bill 30 days later. You are really borrowing for 30 days.
The credit market for your type of bonds though has just crashed. Now, all of a sudden your suppliers want the money upfront before they make the delivery because the market is telling them there is a lot of risk. Suddenly you have this huge need for cash in a way that you never did before. But, nobody is willing to lend to you because they have already lost 90% on the money they did lend to you. Now you can’t get supplies, and your business stops.
What happened? Market risk and liquidity risk actually became credit risk. We evaluated you based on your credit and gave you a rating, but we did not consider what would happen if the entire market collapsed. That would destroy your credit, no matter how good it seems and how responsible you’ve been.
Market risk is credit risk. Nobody seriously considered that, but it’s a fundamental problem of lots of different kinds of insurance. Exactly what I covered in my last post. A CDS protects you against a specific default, not a general default. Few guessed, if any, that the same thing applied to bonds. Why? because in order for it to do so it requires a catastrophic market drop that nobody really considered a serious or credible risk.
Is any of this helpful?
Was not underestimating market risk a cause of Black Tuesday, and thus the Great Depression? I remember a documentary on a special formula that was supposed to take the risk out of investment, by offsetting all investments with buying on margin. The problem was that it assumed a functional market. Is that not the same thing as saying that the market risk would not affect them? Is not a crash in the entire market the ultimate realization of market risk, just using a bigger grouping?
Either way, can you explain why market risk was thought not to affect credit risk in any circumstance? And how does paying money to get better debt ratings factor in?
Man, you are something else! You seriously imagine that you get to assign homework. And I’m to scurry off to do your bidding. And bring the results, so that maybe, just maybe, you will look with favor upon my requests,
Is it, like, your overpowering personal magnetism? Sheer force of will? Sort of a combo Dracula and G. Gordon Liddy? Where do you get this shit?
Your ego has an event horizon.
“I gave up whiskey for weed in 1975. May be the only really smart thing I ever did.”
- Willie Nelson
Oh, please, please, B’rer Scylla, don’t throw me into that troll bin, You can tattoo my eyeballs. Show me Ann Coulter porn! But, don’t…DON’T!!..toss me into that troll bin.
Note to Z: Check out The Big Short by Michael Lewis if you haven’t already. A lot of it centers around this guy Michael Burry who figured out what (apparently) just about nobody else figured out, and bet every dime he could find that what happened would happen. Years before it did. Made like a hundred million. Heaven knows what he might have accomplished if he had the training and experience!
Luce:
Sure I get to assign you homework. That’s what we do. If you make an argument and somebody asks you to support the factual part of it with a cite, you need to do so.
If somebody is addressing your arguments in a debate, you have to reply to the reasonable points they bring up.
Quid pro quo.
I have gone to the trouble to answer the same question you have asked more than 8 fucking times in this one thread. Each time you have either ignored or blown off the answer and then simply asked your question again, later.
When I pointed this out you said I didn’t actually answer your question. I said bullshit. You didn’t address my answers, let’s go over them. Now you are like “you don’t get to assign homework.”
Wtf?
We both know the truth. You are not actually asking a real question. You are just being a douchebag spouting innuendo in the form of an interrogative. It’s disingenuous and fatuous. Or else, I guess it could be a pot addled mind caught in a looplike when you had to put “but soft…” into every post, as if that was clever.
At any rate this is trolling behavior. If you are not a troll, take ownership of the exchange, review it in good faith, show me what is deficient. I then will provide my part and put in the effort necessary to address any legitimate questions.
If you don’t want to do that?
Well, troll may be too strong. But if you are just playing semantic bullshit games and aren’t interested in a sincere exchange of ideas you belong on my ignore list.
Okay, you had me at leverage.
FUCK leverage. I can’t think of any concept in finance that I hate more than leverage. A lot of my antipathy for it comes from the frankly ridiculous multipliers–as a normal human being with a steady job and cash in the bank, I could perhaps reasonably approach an accounting leverage of 10x or so, and that’s if I’m buying relatively fixed-value assets like a house and a car.
Unless I decide to go play stock market maven, and then suddenly I’m leveraged up to 18x.
Then I look at Lehman Brothers, and their 30.7x reported leverage (I’m given to understand the bankruptcy lawyers claim that’s significantly understated), on riskier investments.
Seems to me that a lot of the damage associated with market risk could be mitigated by putting a fairly severe cap on how much leverage a company can have.
And here I think of my dad, who said “I may wait until the last day to pay them, because I don’t look a gift horse in the mouth–but if I don’t have the cash on hand to pay the bill on day 1 I don’t buy it on credit.” when he was giving me a little financial lecture when I got my first credit card. Funny how his approach looks smarter than the guy up above, when market risk comes knocking.
Yes, especially in the sense of how someone actually working in the field thinks about these kinds of issues.
And how you think about the issues sucks, man. I’m sorry, but it does–18x leverage on speculative investments? Give me a fucking break.
I recognize there’s not very many useful legal ways to separate them, but I nonetheless believe that borrowing to purchase long-term fixed assets (house, car, manufacturing plant, whatever) for the use of the entity that’s borrowing is one thing (and perfectly ethically fine), while borrowing to speculate on investments is unethical and wrong.
Sure, that’s why I’ll probably never be in the “1%”. I’ll just have to content myself in knowing my greed didn’t cause me to be so exposed to market risk that I single-handedly made an economic recession worse.
[QUOTE=Himself]
…you belong on my ignore list…
[/QUOTE]
Somehow, some way, I hope I will find the strength to carry on. It will be hard at first, I know, but in time, perhaps…
But, if I am to be cast into the outer darkness with Arty, let me pose the question from a different direction.
Well, gee, Professor Scylla, how come? And, really, “nobody”? Well, not you, we’ve pretty well established that. But, “nobody”? Well, not quite. Ponder this quote from the Wall Street Journal’s review of Mr Lewis’ book, referenced above. Which, Shirley, you’ve read, yes? Or at least know all about, being the expert with years of experience…
Emphasis mine.
A brief overview of the book and its salient points is available here:
http://www.thisux.com/2011/03/07/the-big-short-a-brief-summary-of-the-2008-financial-collapse/
Is this approximately factual? Because, if it is, then your claim that “nobody” saw this coming is subject to some revision. Well, retraction, actually. Because they knew enough about it to dismiss the possibility out of hand. Being the experts, and all, with all that training and experience. And the solid, factual basis for that arrogance? That “…housing prices would continue to rise…” Forever?
So, if Mr Lewis is roughly factual, then, no, its not true that “nobody knew”. They dismissed the possibility, but that’s not quite the same, now is it? Nobody “ran the numbers” Nobody said anything like “Well, if X percent of these mortgage go south, we will have to pay Y amount in credit default swaps. And if that number be (X plus), then we are all boned.”
Nobody? How come? You guys are paid for your expertise, yes? Well, where was all that expertise? Well paid, that’s why you do it, yes?
And bearing down on the really crucial question, the dignity of **Scylla **and the galactic ego it rests upon, how come you didn’t know? Never heard any of this? Not a whisper, not so much as a hint?
It would appear, would it not, that a whole segment of our society is wildly overpaid for expertise and probity they don’t really have. With the serendipitous cooperation of the ratings people, they made a buttload of money, siphoned off from pension funds and the like. And the punchline? They get to keep it!
Unleash Elizabeth Warren!
Arty, move over. Z will be with us quite soon. Bringing pie, so its all good.
Isn’t it amazing how nice Scylla can be, if he thinks he is lecturing to a respectful audience, sitting at his feet and taking notes? It doesn’t last long, does it?