It is time to buy. But not yet. We must wait for the market to hit the bottom. Till then we need to bide our time and drink to it. Bottoms up!
Capitalism has run out of capital. Ich machst nixt Das Kapital! (no it is not really German I just made something up from my Rosetta stone).
However note the profoundity of the statement - Capitalism has indeed run out of Capital! We need a new system. We need communism from China to provide us Capital. What happened to all our capital? Did someone madoff with it ?
We probably spent all our capital on Christmas gifts that nobody wants. We need to figure out a way to grow more capital. Capital does not grow on trees. It needs to be harnessed and managed so that it grows into more capital.
So it is not really a liquidity problem. We just need more money. Stop burning cash and conserve. Only way to build capital is by not wasting it.
Thursday, December 25, 2008
Saturday, September 27, 2008
Who gets a piece of the 700 billion ?
Now that the Senate has passed this huge payout of taxpayer money, how does the loot get divvied up ?
Obviously, since this is US taxpayer money, it should go only to US banks. Foreign banks should not be bailed out, so they can be let out of this equation.
Obviously, market gurus like Goldman, that had absolutely no CDO exposure cannot suddenly come up with "troubled" assets to sell. So they are out. Paulson would not bail out his former Bank - that would look so very suspicious!
So that leaves just Citigroup and Bank o fAmerica, maybe some other smaller players. These guys have already written down billions, so they might actually start reporting profits on the sale of these positions.
The curious part of this drama is how did they come up with the 700 Billion number. Did anybody ask for the calculations behind this number ?
Also, the point of the entire crisis was that nobody could put a good price on these assets. How is the Treasury planning to come up wih a price ? Conversely, if the Treasury knew the price of these assets, it could just tell the market these magical prices. Why do they need 700 billion to backup the prices ?
The correct way to do this was to de-securitize these assets and ban securitization. This package is going to simply get us out of this crisis and defer the crisis for another decade.
Securitization is the same as printing money. This flood will cause inflation and a further dollar collapse. It needs to be curtailed right away.
Obviously, since this is US taxpayer money, it should go only to US banks. Foreign banks should not be bailed out, so they can be let out of this equation.
Obviously, market gurus like Goldman, that had absolutely no CDO exposure cannot suddenly come up with "troubled" assets to sell. So they are out. Paulson would not bail out his former Bank - that would look so very suspicious!
So that leaves just Citigroup and Bank o fAmerica, maybe some other smaller players. These guys have already written down billions, so they might actually start reporting profits on the sale of these positions.
The curious part of this drama is how did they come up with the 700 Billion number. Did anybody ask for the calculations behind this number ?
Also, the point of the entire crisis was that nobody could put a good price on these assets. How is the Treasury planning to come up wih a price ? Conversely, if the Treasury knew the price of these assets, it could just tell the market these magical prices. Why do they need 700 billion to backup the prices ?
The correct way to do this was to de-securitize these assets and ban securitization. This package is going to simply get us out of this crisis and defer the crisis for another decade.
Securitization is the same as printing money. This flood will cause inflation and a further dollar collapse. It needs to be curtailed right away.
Sunday, May 25, 2008
Why go after the Oil companies ?
Higher oil prices have all the politicians eyeing the profits of oil companies. I am happy with the oil companies making some profits. That will encourage more capital to be invested in these companies, which is what we all want. We need to invest in Oil to solve our energy problems.
But oil prices are not being driven by the oil companies. Prices are being driven up by speculators, mostly global hedge funds. These guys do not invest their profits in the oil industry. They use leverage to drive up the prices of what are essential commodities for the rest of the world, and then disappear with their ill gotten gains. So all you agitated people, go after the hedge funds, not the oil companies. There lies the real villain of the piece.
But oil prices are not being driven by the oil companies. Prices are being driven up by speculators, mostly global hedge funds. These guys do not invest their profits in the oil industry. They use leverage to drive up the prices of what are essential commodities for the rest of the world, and then disappear with their ill gotten gains. So all you agitated people, go after the hedge funds, not the oil companies. There lies the real villain of the piece.
Saturday, February 9, 2008
Kerviel and the Back office control environment
SocGen had one of the best risk management systems. Yet there was such a major failure of controls. No one knows how he was able to pick the locks. He had a perverse understanding of the "complex" control systems because of his experience in the middle office.
That is really hogwash. The Middle office teaches you how to book trades and how to calculate P&L. The Middle office does not teach you anything about the control system, as the controls are mostly in the Back-Office.
This is how derivative trades are actually controlled. Trader does a trade, presses a button and the system books it and sends it through to the Back-Office. Back-office calls the counterparty and confirms the details of the trade. At settlement, Back-office moves cash with the counter-party's Back-office. Trader estimates his Profit or loss, Middle-office confirms his profit or loss, and Back-office counts the cash. Its all very simple really, when you are counting just one widget.
In reality it works this way. Trader does a million trades. Sytem processes everything"STP' - straight through processing. Trader has no way to track the beans, so he relies on the system to calculate his Profit or loss. Very rough estimates are made based on the "risk". But as the complexity and volume increases, these estimates become less and less reliable. Middle Office has the same problem. Middle Office uses the very same systems to re-estiamte the P&L, and generally would like to agree with the Trader. Back-Office pays out the cash. All the outsourcing has resulted in the Back-office being in India, Buffalo, Singapore or some other unreachable place. Most of the time they are just paying out the cash as fast as the orders come in to settle. If something is missing they might track it, or they might let it go, depending on their situation. So cash is no longer counted, one major control does not really work.
The other control is the confirmation with the counterparty. Again, this is a Back-office function that has systematically been reduced to bare bones. Most places are back-logged on confirmations for atleast a few months. There are millions of trades with internal counterparties that are not tracked at all. There are old portfolis that no-one looks at, new ones that were opened without everyone knowing about it, dummy portfolio that should not have live trades and so on.
The point here is that we are not manufacturing cars, or making small loans out of the local credit Union. There the beans are generally counted and Accounted for at a higher level of accuracy. The derivative business is a lot of smoke and mirrors, filled with charlatans.
The kid fresh out of Ivy league schoool with a few sound bytes about how the market "thinks" gets to play with millions of dollars as a Trader. The CEO does not know the Trader's positions, the head of the desk may not know the extent of all the Trader's positions, the middle office person that does his P&L does not know a whole lto more, and the Back-office processor that pays out on these transactions does not know either. The truth is that no-one really knows or asks questions. As long as the numbers are positive, everyone gets paid. "Them that ask no questions, are'nt told no lies- so watch the wall my darling, as the gentlemen go by" - Smuggler's song. So it is really surprising that there are so few of these blow-ups.
That is really hogwash. The Middle office teaches you how to book trades and how to calculate P&L. The Middle office does not teach you anything about the control system, as the controls are mostly in the Back-Office.
This is how derivative trades are actually controlled. Trader does a trade, presses a button and the system books it and sends it through to the Back-Office. Back-office calls the counterparty and confirms the details of the trade. At settlement, Back-office moves cash with the counter-party's Back-office. Trader estimates his Profit or loss, Middle-office confirms his profit or loss, and Back-office counts the cash. Its all very simple really, when you are counting just one widget.
In reality it works this way. Trader does a million trades. Sytem processes everything"STP' - straight through processing. Trader has no way to track the beans, so he relies on the system to calculate his Profit or loss. Very rough estimates are made based on the "risk". But as the complexity and volume increases, these estimates become less and less reliable. Middle Office has the same problem. Middle Office uses the very same systems to re-estiamte the P&L, and generally would like to agree with the Trader. Back-Office pays out the cash. All the outsourcing has resulted in the Back-office being in India, Buffalo, Singapore or some other unreachable place. Most of the time they are just paying out the cash as fast as the orders come in to settle. If something is missing they might track it, or they might let it go, depending on their situation. So cash is no longer counted, one major control does not really work.
The other control is the confirmation with the counterparty. Again, this is a Back-office function that has systematically been reduced to bare bones. Most places are back-logged on confirmations for atleast a few months. There are millions of trades with internal counterparties that are not tracked at all. There are old portfolis that no-one looks at, new ones that were opened without everyone knowing about it, dummy portfolio that should not have live trades and so on.
The point here is that we are not manufacturing cars, or making small loans out of the local credit Union. There the beans are generally counted and Accounted for at a higher level of accuracy. The derivative business is a lot of smoke and mirrors, filled with charlatans.
The kid fresh out of Ivy league schoool with a few sound bytes about how the market "thinks" gets to play with millions of dollars as a Trader. The CEO does not know the Trader's positions, the head of the desk may not know the extent of all the Trader's positions, the middle office person that does his P&L does not know a whole lto more, and the Back-office processor that pays out on these transactions does not know either. The truth is that no-one really knows or asks questions. As long as the numbers are positive, everyone gets paid. "Them that ask no questions, are'nt told no lies- so watch the wall my darling, as the gentlemen go by" - Smuggler's song. So it is really surprising that there are so few of these blow-ups.
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