In 427 class the other day, we talked about transparency and exchange trading of OTC derivatives. In this piece, you get an update on OTC derivatives reform for the G-20 meetings from the Financial Stabiility Board. If you want more details on the nitty-gritty of margins for OTC derivatives, go here. The paper is long, at least read the executive summary. The procedures and processes described in these documents are European in origin, but similar concerns pervade our markets as well,
1. Since the depths of the financial crisis in 2008, I have felt compelled to track the story of Jefferson County. Perhaps it “smelled” from the start, after all securities were sold to finance the construction of a sewer system! Its latest exit plan is here. Along the same lines,a story about vulture hedge funds circling other municipal carcasses (here).
2. A colleague sent along this video link on asset pricing (here). It is in the spirit of macro videos I have posted before talking about the Bernank.
3. Vanity Fair does its periodic story of financial shenanigans. Every one that I have read has been worth its time, several are in various places on this site. This one (saved here), talks about SAC Capital, one of the most successful hedge funds ever and fleshes out what happens in this business more often than not. Shades of Galleon, Gupta and Guiliani!
Another initiative from the Federal Housing Finance Agency (here) is a must read for crisis junkies. The money quote is ”
“Fannie Mae and Freddie Mac will offer a new, simplified loan modification initiative to minimize losses and to help troubled borrowers avoid foreclosure and stay in their homes. Beginning July 1, servicers will be required to offer eligible borrowers who are at least 90 days delinquent on their mortgage an easy way to lower their monthly payments and modify their mortgage without requiring financial or hardship documentation.”
Huh! Read it again. Here is what it is saying. If you cannot pay your mortgage, you can enroll in a program to lower your payments without documentation. And what is this program ? Reading further, it is a refi to extend the maturity of the loan and lock in today’s low (ish) fixed rate. Bingo, your payments are lower and you have a better chance of meeting them.
Is this why our avuncular Government is called Uncle Sam ? Inquiring minds would want to know why such kindness is being extended to deadbeats. Could it be that the banking system cannot afford to foreclose on these loans? If this is true, it has to mean that the money recovered from foreclosure (at current, still low market prices) would not be enough to make many of the banks solvent. After 5 years of stress tests, no less. Some housing recovery this.
As you know well, I cannot help being obsessed with how the last fews years affected the many hats I wear as a finance person- teacher, scholar, researcher, consultant, investor, trader. One of many conferences by academics who are similarly preoccupied just took place recently. The link is HERE. The paper presenters are far more illustrious than I will ever be and their tales are quite compelling.
I cannot allude to my peers in the profession without bringing your attention THIS article about Yale finance Professor Bob Shiller in the Chronicle of Higher Education.
This story of the largest municipal failure is another case of floating interest rate security investments gone wrong. In 2001, with rates at historic lows, Jefferson County, AL got talked into reducing their borrowing costs by issuing floating rather than fixed rate loans. Part of these were swaps and the bulk were “auction rate securities.” These are basically bonds whose interest rates are reset by monthly dutch auctions. In 2008 this market fails and many of the securities have been frozen every since. Municipal bond insurers were failing in 2008 and couldn’t guarantee these loans, so the banks that served as bidders of last resort in these securities declined to participate. The whole story is complicated by the fact that the county was also messing about in swaptions (yes these are options on swaps) market. The 2008 story is here. I remember talking about it in a 427 class at that time.
And of course you read the story of LCH-Clearnet raising margin requirements on Italian bonds and their derivatives, many of which were in the MF global portfolio. They serve as the clearing house and that one move was sufficient to trigger a 400 point drop in the Dow and similar moves in world market indexes.
Rumors that the Greek govt may not last long enough to do the referendum has the futures screaming up after market. Who is crazy enough to trade this volatility? At times like these, my go-to contrarian plays are long TBT or short VIX, the former a tad more attractive than the latter. Either should turn out okay, if this rumor does not reverse overnight!
And dutifully the Fibonacci guys (here) and gap guys (here) appear after I spoke about them this morning. Actually the first posted in the morning, but I promise I didn’t see it before class! If I am so good, why am I not making much coin?
That was short and sweet. Throw fundamental and technical analysis out the window. Traders remorse, whatever. The dollar goes up, everything else goes down and it is back into the range again. Curious how the unexpected keeps happening on a daily basis. Late last week was the VIX dropping and Europe off-the-table. The first two days of this week has shown overnight risk to be huge. Two-sidedness has not really worked either- it is my fault for trying to be delta-neutral on the fly, something you cannot do in these markets. So, being stopped out yesterday, wisdom would suggest staying out, but will I listen to myself ?
On September 13-14, the Brussels-based think tank BRUEGEL and the Peterson Institute for International Economics hosted a conference on Resolving the European Debt Crisis. Held in Chateau Les Fontaines in Chantilly, near Paris, the conference assembled about four dozen policy experts and practitioners, mainly from Europe and the United States. The conference was designed to contribute to a better understanding of the implications of alternative approaches to resolving the crisis, in particular, the dynamics of interaction among various stakeholder groups as policy decisions evolve. Support for the conference was provided by Tudor Investment Corporation and BlackRock Investment Management.
The website is here. If you have any interest in such policy issues and you SHOULD, then read it…
One of the nice fallouts of the 2008-09 crisis was that there were a series of well-constructed graphs and articles in the media, many of which are in various places on this website. As the planet revisits credit issues, I am seeing more of the same. Here for your perusal are some, there will be more.
a) How banks got TBTF (too big to fail), from Mother Jones, here. The chart of the series of mergers since the 1990’s that created JPMorgan, Bank of America and Wells Fargo is priceless.
b) Simon Johnson- someone who saw this coming from his perch at the IMF a few years ago and since then as a Professor at MIT, (here).
c) Mauldin, writing for his high net worth investor base (here).
d) And a story about how Fannie and Freddie might have bailed out Bank of America!! (here). The story told is of F and F (read your govt), bidding on mortgage assets (read Countrywide) with B of A in order to infuse capital. This after Warren did his bit. How different is this from France/Germany/Spain etc bailing out each other?
This story from the WSJ is perfectly timed for 427, just as we begin talking about the credit and the financial crisis. You know, the one the government just solved. Or did they?
A related note is this presentation by hedge fund manager David Einhorn at the Value Investing Congress I mentioned yesterday. It is about a Florida real estate company with serious asset write-down problems. Before the presentation, it was trading around $25, now it is at $20. Einhorn claims it is worth about $10. FYI-1 this was the guy who was short Lehman all the way down. FYI-2, the Fairholme fund, another hot-shot hedge fund is apparently very long St. Joe. FYI-3 the presentation is 139 pages long. See what homework means when you manage serious money!
Let us see what sort of backbone this market has. Google selling off steadily (preview of Apple on Monday?) but the rest of it is holding up well.
SGB WEB 