there has been talk amongst market participants about an umbrella you want to be under. steve leisman spoke of it as a club you want to be in. either you're in or you're out. this club or umbrella if you will is the umbrella of the US government which hovers over institutions that are "too big to fail," or "too big to let fail." the name of the game at this point is trying to figure out who is closest to the handle with both hands firmly clinging to the shaft. if that's not you, you're gonna get wet.
i disagree. when the weather's bad enough the umbrella isn't much help. in a hurricane it rains hard, but getting wet is the least of your problems and an umbrella is worthless. you better be worried about getting swept away. so far we are seeing this is true. whether you fail or are bailed out, investors of these entities are getting wiped out.
if there is a fed umbrella for a select few, the TARP addresses the problem on a much larger scale. the tarp is a disaster shelter. the market needs this, and it may not be enough. i can say with great confidence that if the TARP doesn't pass it will take a loooong time for investors to recover to previous levels. i'm tired of this being called a Wall St bailout. There will be plenty of pain on the Street long after the TARP is put into action. people don't know what's best for them. Main St doesn't know and shouldn't be expected to know how LIBOR effects them. That is a shortcoming of our education system. But Congress has no clue either. That's shameful.
there's also a human side of this. it's gonna get even more human if the TARP doesn't pass. jobs will be lossed, homes will be lossed. i'm working 14 hour days. i don't experience the outdoors during daylight hours. i am going to church tomorrow.
Monday, September 29, 2008
Tuesday, September 16, 2008
Neighborhood on Fire
If Fannie Mae and Freddie Mac were a house of cards, it's safe to say a week later the whole neighborhood is up in flames and everyone is taking some damage. This is the Chicago fire equivalent in our current financial markets. It is truly incredible. Work isn't supposed to be personal, but this is pretty frightening.
AIG just got rescued by the Federal Government. Probably necessary to maintain order but also necessary from a policy standpoint, which is also a political standpoint. If you let Lehman fail, who loses? Lehman employees, investors, people Main Street doesn't feel connected to enough to save. But with AIG it is a different story. The general public is at risk. Picture the headline of someone losing their house in Texas to hurricane Ike and two weeks later not getting an insurance settlement because they did their insurance through AIG. The government doesn't want that on their hands. In my opinion, that is why the government stepped in. They say AIG is more connected but I don't know about that. Bigger balance sheet yet. But larger counterparty exposure risk? Suspect to me...Lehman was THE bond house.
Again, work is just off the wall right now. Weekends, late nights, hours that are not only long but very intense. The whole world is trying to figure out where and how they are exposed to AIG, Lehman, Merrill, Bank of America, Washington Mutual, etc. It is one of those times you really have to put the rest of your life on hold. I'm going in at 5:30am tomorrow morning to be around for clients. I'll be in early the rest of the week. Some people have been coming in at 4am and leaving at night. I admire my colleagues continued commitment. Pride. These are the times we need to push ourselves and make a difference in the world. I try to encourage the discouraged employees to see the big picture.
I'm sure others are experiencing this right now, but I just can't sleep though I really want to because I have an EARLY morning tomorrow. There's a lot on my mind keeping me up at night, namely systemic risk. One of our Managing Directors said it best last week, "You don't make up at 2 in the morning worrying about the fat right tail." Guess he's right, this is the left tail, and in contrast to FNM and FRE's government bailout, this is truly a black swan.
The unthinkable has become reality.
In other news, the Fed held rates today. We are of the opinion the statement is way off the mark with concern to inflation. The Fed can't use the word deflation, but that's the real problem. Not sure I understand how cutting rates would help that, but I definitely agree the statement was way detached from reality.
I got a new phone. Blackberry. It's nice.
AIG just got rescued by the Federal Government. Probably necessary to maintain order but also necessary from a policy standpoint, which is also a political standpoint. If you let Lehman fail, who loses? Lehman employees, investors, people Main Street doesn't feel connected to enough to save. But with AIG it is a different story. The general public is at risk. Picture the headline of someone losing their house in Texas to hurricane Ike and two weeks later not getting an insurance settlement because they did their insurance through AIG. The government doesn't want that on their hands. In my opinion, that is why the government stepped in. They say AIG is more connected but I don't know about that. Bigger balance sheet yet. But larger counterparty exposure risk? Suspect to me...Lehman was THE bond house.
Again, work is just off the wall right now. Weekends, late nights, hours that are not only long but very intense. The whole world is trying to figure out where and how they are exposed to AIG, Lehman, Merrill, Bank of America, Washington Mutual, etc. It is one of those times you really have to put the rest of your life on hold. I'm going in at 5:30am tomorrow morning to be around for clients. I'll be in early the rest of the week. Some people have been coming in at 4am and leaving at night. I admire my colleagues continued commitment. Pride. These are the times we need to push ourselves and make a difference in the world. I try to encourage the discouraged employees to see the big picture.
I'm sure others are experiencing this right now, but I just can't sleep though I really want to because I have an EARLY morning tomorrow. There's a lot on my mind keeping me up at night, namely systemic risk. One of our Managing Directors said it best last week, "You don't make up at 2 in the morning worrying about the fat right tail." Guess he's right, this is the left tail, and in contrast to FNM and FRE's government bailout, this is truly a black swan.
The unthinkable has become reality.
In other news, the Fed held rates today. We are of the opinion the statement is way off the mark with concern to inflation. The Fed can't use the word deflation, but that's the real problem. Not sure I understand how cutting rates would help that, but I definitely agree the statement was way detached from reality.
I got a new phone. Blackberry. It's nice.
Monday, September 8, 2008
House of cards
I just read this article. After passing Level I in December and sitting for Level II unsuccessfully in June, I have some perspective on the accounting methods used by Fannie and Freddie. I'm almost tempted to crack open the Schweser notes and look up the accounting warning signs.
First of all, let me just say this. Perhaps my naivete is an asset here; because this just sounds ridiculous to me having only been in the industry two years, but to others I guess they must have been so used to it. I can't believe how levered the balance sheet was. The Bloomberg article I attached talks about the firms capital. See, when banks or lenders like Fannie and Freddie operate, they make money by borrowing at one interest rate and lending at a slightly higher rate. This is called the "spread" they earn. Also, banks and lenders need to have sufficient capital. That means that any bank has to have a certain amount of money in deposits at all times to comply with law. This prevents panic if people start going nuts withdrawing money. This is A and B of Banking ABCs. A) Borrow short term, lend long term, earn the spread and B) have sufficient capital. Well, FNM and FRE's capital got pretty low because they started losing mad money on all the mortgages people are walking away from. Then people started getting worried. Thus, the market ceased giving the agencies favorable rates. This compressed the spread they earned. When you can't borrow at a low interest rate, the business model is kaputz. And things collapse like a house of cards.
Now here is the kicker, if you have hopefully read this far. Fannie most recently stated $47BB in capital. $20.6BB of this was in DEFERRED TAX ASSETS. Are you kidding me? Is this new information? DFAs are tax credits and you can treat them as an asset because you will reduce your taxes in the future. But when your business model is broken, you don't make money, and when you have no income you don't pay income tax so nearly 50% of their capital was in assets that could more than likely be taken off the balance sheet. At $47BB, they were about $9.5BB above the requirement, but as it turns out when the Feds starting looking at the books, $20.6BB was in deferred tax assets. So for some time up to this point, best accounting practices would have calculated both companies as severely undercapitalized. This just blows my mind. I have a lot of questions. Who audited their financials? How was this acceptable in the past?
That's the macro blog.
Here's the micro blog.
Today was crazy at work. Our Investment Committee worked through the entire weekend. I went into a meeting at 7:30am with the client servicing group and we got debriefed on the situation. We are lucky to be so well positioned across most of our portfolios. That makes our job easier for sure, but I really admire how our firm has been able to focus and concentrate on understanding the recent developments in FNM and FRE so we can properly convey it to our clients. I was just stacked with work all day but I felt fulfilled by my job today. I'm really glad I believe in what we do at our firm and I think we do good work for the world.
I'm also worried about the banking system. The government took the companies into conservatorship, and in the process the common shareholders get nearly wiped out, the bond holders and mortgage holders get made whole (get their money back), and the preferred shareholders unfortunately, like the common holders, don't get made whole. I think this could change. Here's why. A lot of banks hold this preferred paper. It's trading down over 50% from where most owners got in at. A lot of banks hold this in huge quantities. I saw some reports that this is over 20% of some bank's capital. That's not good. The Treasury might have to step in and prop up the preferreds to.
That's all I have for tonight. Again I can't emphasize how impressed I am by my colleagues. Some groups worked all weekend to brief us this morning on the situation. Other groups came in at 5am to prepare for a volatile trading day. I was in the office today for 11 hours getting information out to clients. These are exciting and turbulent times in the bond market. So much has changed from start to now in my two years of working.
First of all, let me just say this. Perhaps my naivete is an asset here; because this just sounds ridiculous to me having only been in the industry two years, but to others I guess they must have been so used to it. I can't believe how levered the balance sheet was. The Bloomberg article I attached talks about the firms capital. See, when banks or lenders like Fannie and Freddie operate, they make money by borrowing at one interest rate and lending at a slightly higher rate. This is called the "spread" they earn. Also, banks and lenders need to have sufficient capital. That means that any bank has to have a certain amount of money in deposits at all times to comply with law. This prevents panic if people start going nuts withdrawing money. This is A and B of Banking ABCs. A) Borrow short term, lend long term, earn the spread and B) have sufficient capital. Well, FNM and FRE's capital got pretty low because they started losing mad money on all the mortgages people are walking away from. Then people started getting worried. Thus, the market ceased giving the agencies favorable rates. This compressed the spread they earned. When you can't borrow at a low interest rate, the business model is kaputz. And things collapse like a house of cards.
Now here is the kicker, if you have hopefully read this far. Fannie most recently stated $47BB in capital. $20.6BB of this was in DEFERRED TAX ASSETS. Are you kidding me? Is this new information? DFAs are tax credits and you can treat them as an asset because you will reduce your taxes in the future. But when your business model is broken, you don't make money, and when you have no income you don't pay income tax so nearly 50% of their capital was in assets that could more than likely be taken off the balance sheet. At $47BB, they were about $9.5BB above the requirement, but as it turns out when the Feds starting looking at the books, $20.6BB was in deferred tax assets. So for some time up to this point, best accounting practices would have calculated both companies as severely undercapitalized. This just blows my mind. I have a lot of questions. Who audited their financials? How was this acceptable in the past?
That's the macro blog.
Here's the micro blog.
Today was crazy at work. Our Investment Committee worked through the entire weekend. I went into a meeting at 7:30am with the client servicing group and we got debriefed on the situation. We are lucky to be so well positioned across most of our portfolios. That makes our job easier for sure, but I really admire how our firm has been able to focus and concentrate on understanding the recent developments in FNM and FRE so we can properly convey it to our clients. I was just stacked with work all day but I felt fulfilled by my job today. I'm really glad I believe in what we do at our firm and I think we do good work for the world.
I'm also worried about the banking system. The government took the companies into conservatorship, and in the process the common shareholders get nearly wiped out, the bond holders and mortgage holders get made whole (get their money back), and the preferred shareholders unfortunately, like the common holders, don't get made whole. I think this could change. Here's why. A lot of banks hold this preferred paper. It's trading down over 50% from where most owners got in at. A lot of banks hold this in huge quantities. I saw some reports that this is over 20% of some bank's capital. That's not good. The Treasury might have to step in and prop up the preferreds to.
That's all I have for tonight. Again I can't emphasize how impressed I am by my colleagues. Some groups worked all weekend to brief us this morning on the situation. Other groups came in at 5am to prepare for a volatile trading day. I was in the office today for 11 hours getting information out to clients. These are exciting and turbulent times in the bond market. So much has changed from start to now in my two years of working.
Saturday, September 6, 2008
This house is burning down
There is a lot going on in the world right NOW. Forget about the election. The federal government, the Department of the Treasury to be exact, is stepping in to seize control of Fannie Mae and Freddie Mac and save the failing companies using Uncle Sam's checkbook. This has serious implications for the bond market. This debt is held in large concentrations on the balance sheets of large institutions around the world. Additionally it has been trading at huge spreads to treasuries lately. Now, a FNM or FRE bond resembles a treasury and spreads are going tighter, especially in the most senior debt in the capital structure. So far it looks like the common shareholders are going to take a bath.
This ties in to the book I am reading right now, Nassim Taleb's "Fooled by Randomness" in which Black Swans are discussed. Black swans are essentially life's unpredictable events. Taleb argues we are conditioned to think that life has causation and predictability. Everyone learns in college about statistical probabilities and the normal distribution. The mere fact that the distribution is termed "normal" alludes to the assumption most people make about the predictability of life. Taleb argues that life's not "normal" and the distribution of life's events are actually more leptokurtic with high impact "fat tail" random events that can't be predicted.
So is this a black swan event? The treasury isn't known to step in and inject government money into a private company. But this was predicted by a lot of the smart money on the Street. We are going to see some huge spread tightening that would definitely be a fat tail event on a frequency distribution chart. What I deduce from this is that you can't reduce this situation to mathematics. How could you? People have tried with differing degrees of success to reduce trading markets to mathematical probabilities. That seems impossible in this situation given that Washington policy makers are directly involved and I can't imagine any mathematical success has been achieved in predicting Washington policy making.
Taleb is sort of onto something. There are hundreds of strategies out there that are only susceptible to losses in the proverbial hundred year storm. However, it's turning out that these storms are coming around quite often. Early 90's housing crash, late 90's Russian Ruble crisis and LTCM blowup, dot com crash, and now the credit crunch/housing crisis. Each one has required "unprecedented" government intervention, most recently FNM and FRE as well as the rescue of Bear Stearns. While market policy setters in Washington preach free markets and limited intervention, they usually seem to feel empowered in their time in office to intervene.
So it turns out that this government intervention and injection of capital into FNM and FRE that the market had been calling for for some time were pushed into action by some recent discoveries into FNM and FRE's accounting practices. Basically these government sponsored entities (GSEs) are like huge banks. Like any bank, they need to have sufficient capital (ie money) to back themselves up. Well, the Treasury hired Morgan Stanley to look over the two firm's assets and found that while legal, the accounting practices used, in accounting lingo, would be what is known as "qualified," ie not up to snuff. Thus, their ailing balance sheets are worse than we thought!
Well I hope you could sit through that and I apologize if you are totally lost. In other news, I had never eaten at Hooter's as of two weeks ago and I have since eaten there twice. Maybe because I live so close to one. Or maybe it's a random black swan type of occurrence. I went to a girl's bday dinner a week or so ago and this weekend my dad is visiting, basically on a vacation from my mom, and he wanted to go because he's never been there. Something about that place bugs me. I really wish the waitresses wouldn't write their names on the napkins. That's so dumb and corny. It was funny to see a kid there with his dad and older brother for his 13th birthday. It's like a puberty party. After that I played night golf with my dad, sister, and brother in law.
Tonight I am 100% alone. I have 3 roommates, all girls, one of which is my sister. I think they are all with their BFs. I am Hans Solo. However, I have a lot of stuff to entertain me. I've got the first season of Flight of the Conchords going, I have a book to read (Fooled by randomness), and a blog. And a thriving multilingual AIM convo...shout out!
This ties in to the book I am reading right now, Nassim Taleb's "Fooled by Randomness" in which Black Swans are discussed. Black swans are essentially life's unpredictable events. Taleb argues we are conditioned to think that life has causation and predictability. Everyone learns in college about statistical probabilities and the normal distribution. The mere fact that the distribution is termed "normal" alludes to the assumption most people make about the predictability of life. Taleb argues that life's not "normal" and the distribution of life's events are actually more leptokurtic with high impact "fat tail" random events that can't be predicted.
So is this a black swan event? The treasury isn't known to step in and inject government money into a private company. But this was predicted by a lot of the smart money on the Street. We are going to see some huge spread tightening that would definitely be a fat tail event on a frequency distribution chart. What I deduce from this is that you can't reduce this situation to mathematics. How could you? People have tried with differing degrees of success to reduce trading markets to mathematical probabilities. That seems impossible in this situation given that Washington policy makers are directly involved and I can't imagine any mathematical success has been achieved in predicting Washington policy making.
Taleb is sort of onto something. There are hundreds of strategies out there that are only susceptible to losses in the proverbial hundred year storm. However, it's turning out that these storms are coming around quite often. Early 90's housing crash, late 90's Russian Ruble crisis and LTCM blowup, dot com crash, and now the credit crunch/housing crisis. Each one has required "unprecedented" government intervention, most recently FNM and FRE as well as the rescue of Bear Stearns. While market policy setters in Washington preach free markets and limited intervention, they usually seem to feel empowered in their time in office to intervene.
So it turns out that this government intervention and injection of capital into FNM and FRE that the market had been calling for for some time were pushed into action by some recent discoveries into FNM and FRE's accounting practices. Basically these government sponsored entities (GSEs) are like huge banks. Like any bank, they need to have sufficient capital (ie money) to back themselves up. Well, the Treasury hired Morgan Stanley to look over the two firm's assets and found that while legal, the accounting practices used, in accounting lingo, would be what is known as "qualified," ie not up to snuff. Thus, their ailing balance sheets are worse than we thought!
Well I hope you could sit through that and I apologize if you are totally lost. In other news, I had never eaten at Hooter's as of two weeks ago and I have since eaten there twice. Maybe because I live so close to one. Or maybe it's a random black swan type of occurrence. I went to a girl's bday dinner a week or so ago and this weekend my dad is visiting, basically on a vacation from my mom, and he wanted to go because he's never been there. Something about that place bugs me. I really wish the waitresses wouldn't write their names on the napkins. That's so dumb and corny. It was funny to see a kid there with his dad and older brother for his 13th birthday. It's like a puberty party. After that I played night golf with my dad, sister, and brother in law.
Tonight I am 100% alone. I have 3 roommates, all girls, one of which is my sister. I think they are all with their BFs. I am Hans Solo. However, I have a lot of stuff to entertain me. I've got the first season of Flight of the Conchords going, I have a book to read (Fooled by randomness), and a blog. And a thriving multilingual AIM convo...shout out!
Tuesday, September 2, 2008
blohg blohg blohg
Today was nuts. Really crazy. So goood.
I kicked off my morning by hitting the pavement at 5:45am for a 1.6 mile neighborhood watch run. I just call it that. It's not official neighborhood watch, but I am keeping an eye out. All I really saw was a lady walking her two poodles. My sluggish sweaty butt was probably the scariest thing out in the neighborhood this morning.
So for those readers who are not finance/investment people, today was the first business day of September. It's a crazy day for client servicing people. I was totally swamped from the second I got into work. See, after month end it's important to let the clients know about their account's performance and stuff over the previous month. In a very "Office Space" type of way, my assignments and tasks are itemized with an indication of how long each one should take. Well, according to my assignment list I had 9 hours of work to do. On top of that, I had 6 hours of scheduled training. So that would amount to a 15 hour day. Long story short, I really hunkered down and finished everything about 6pm. It was a rewarding day because I overcame a mountain of work in a reasonable amount of time. Feels good inside.
After work I was double booked. We had a new associate networking dinner at a fancy restaurant. I ordered a rack of lamb on the company and had a few glasses of some red wine that someone cultured picked out. It's always nice when they do these things for us. I had to leave a bit early to catch a bonfire put on by Liwanag. The two events consecutively really juxtapose the two experiences. I was thinking about it on the ride home from CDM. On one hand, the new associates are a lot like me and they are really intelligent. On the other hand, I feel like LOGers are unbelievable people who are better persons than I could ever be. Maybe my grammar's off there but I think I conveyed the point. Maybe I just enjoyed the bonfire more because some of those people can really sing well.
Well. I'm pooped. Good stuff.
I kicked off my morning by hitting the pavement at 5:45am for a 1.6 mile neighborhood watch run. I just call it that. It's not official neighborhood watch, but I am keeping an eye out. All I really saw was a lady walking her two poodles. My sluggish sweaty butt was probably the scariest thing out in the neighborhood this morning.
So for those readers who are not finance/investment people, today was the first business day of September. It's a crazy day for client servicing people. I was totally swamped from the second I got into work. See, after month end it's important to let the clients know about their account's performance and stuff over the previous month. In a very "Office Space" type of way, my assignments and tasks are itemized with an indication of how long each one should take. Well, according to my assignment list I had 9 hours of work to do. On top of that, I had 6 hours of scheduled training. So that would amount to a 15 hour day. Long story short, I really hunkered down and finished everything about 6pm. It was a rewarding day because I overcame a mountain of work in a reasonable amount of time. Feels good inside.
After work I was double booked. We had a new associate networking dinner at a fancy restaurant. I ordered a rack of lamb on the company and had a few glasses of some red wine that someone cultured picked out. It's always nice when they do these things for us. I had to leave a bit early to catch a bonfire put on by Liwanag. The two events consecutively really juxtapose the two experiences. I was thinking about it on the ride home from CDM. On one hand, the new associates are a lot like me and they are really intelligent. On the other hand, I feel like LOGers are unbelievable people who are better persons than I could ever be. Maybe my grammar's off there but I think I conveyed the point. Maybe I just enjoyed the bonfire more because some of those people can really sing well.
Well. I'm pooped. Good stuff.
Monday, September 1, 2008
V2O
I've wanted to go to this place for a while now and I finally got to go. In case you haven't heard, V20 is known as an Asian club. This night was no exception. Lots of Asians. In the end though it doesn't really make a difference versus any other club. I get the same impression about this place as most other places. It seems like 95% of these people make a full time job out of going clubbing. I see people dropping hundreds of dollars and I can't imagine or see them doing anything else in life besides clubbing, drinking and smoking. That's not to say that I didn't have fun or that there weren't other cute girls there dotted amongst the speaker-box hoes (SBH's are the girls who like to dance on top of speaker boxes in clubs). I had a lot of fun actually. I went for Tracy's 21st birthday finale celebration and it was good to see her have a really good time. The best people to party with are the people who don't party often when they are in the mood to party it up. That was definitely the case here. Cool girl. I danced with another cool girl there and talked to her a bit but I never saw her again the rest of the night. No phone number. Bummer. Shoulda asked up front. Life goes on.
Today is September 1st. 60 days from now I will start studying again. I'm ready. I've had my fill of partying and socializing for a while. I want to pass but I also want to nail it. I want to know this material really well so I can apply it someday. 60 days from now I take ownership.
Today is September 1st. 60 days from now I will start studying again. I'm ready. I've had my fill of partying and socializing for a while. I want to pass but I also want to nail it. I want to know this material really well so I can apply it someday. 60 days from now I take ownership.
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