Results tagged “finance”
I keep telling people about this one passage in The Big Short
(which is totally awesome and very worth reading if you want to have a better understanding of why we're in the financial state we're in). Anyway, it's actually a footnote to the following quote from John Mack from Morgan Stanley (in response to an analyst asking how in the world they let one desk lose $8 billion):
Bill, look, let's be clear. One, this trade was recognized and entered into our accounts. Two, it was entered into our risk management system. It's very simple. when these got, it's simple, it's very painful, so I'm not being glib. When these guys stress loss the scenario on putting on this position, they did not envision...we could have this degree of default, right. It is fair to say that our risk management division did not stress those losses as well. It's just simple as that. Those are big fat tail risks that caught us hard, right. That's what happened.
The quote is nothing special. It's confusing and obtuse, but otherwise unremarkable. Which is exactly the point Michael Lewis makes in his footnote: "It's too much to expect the people who run big Wall Street firms to speak plain English, since so much of their livelihood depends on people believing that what they do cannot be translated into plain English."
Since reading that I've been thinking about a bunch of different industries that fit that bill. Law seems like an obvious one: If we all believed we should be able to read and understand legal documents there would be a lot less money spent on lawyers. Not sure what I have a bigger point than that, but seemed worth sharing.
Tags: business, culture, finance, language, law
I read Too Big to Fail because of this Financial Times review that called it the best account of a "tumultuous financial collapse or scandal" since Barbarians at the Gate
. Needless to say that's what I'm reading now and it's excellent.
All of that is a long way of introducing an interesting quote I read in the book last night about why one stock can be overvalued and another undervalued:
Institutional investors--the big pension and mutual funds who could make or break stocks--typically chose just one tobacco stock for their portfolios, and more often than not it was Philip Morris. With their support, Philip Morris stock had risen 25 percent since the beginning of 1987, while RJR Nabisco's, after spiking up and down, was flat. Portfolio managers liked Philip Morris's predictability. They thought they knew where Maxwell was going. They never knew what Johnson was up to.
This seems like the sort of thing that folks who know about finance already know (so if there are any of you reading this I apologize), but for me it was eye opening. I mean it makes perfect sense that you would choose one, most everyone is aware of the theory of diversification after all. I guess I'm just surprised at how obvious it is that, in this case, a very specific peculiarity of the market, and the way we approach it, is affecting the price. Not sure if I'm really explaining myself properly here, but I'll just leave it at that for now until I can come up with something better to say.
Tags: finance, stock
I just recently finished Too Big to Fail
, which I can't recommend highly enough. (Don't worry, it's not a dense read, much more a story/character study.) Anyway, since finishing I've been pretty curious what all the folks in the book are up to these days. Some of them, like the bank heads who kept their jobs, are easy to track down but then there are guys like Neel Kashkari, who was in charge of TARP that have since left treasury.
Anyway, turns out The Washington Post did a nice profile of Kashkari who has moved to California and is literally trying to detoxify himself from the DC experience by building sheds and walking dogs (he got pretty ravaged by both the late nights and congress). Well worth the read if you're into this sort of stuff.
Tags: finance, politics
The FT had a great article last week on all the different ways economists try to use scientific principles to understand their world. It's chock full of interesting insights.
Early in the article they explain that while all these banks were diversifying, they were all diversifying in the same way, something we know all understand. What was especially interesting, though, was that when you think of especially diverse ecosystems, like the rainforst, they're actually not all that strong with "so many interdependent species that it is more vulnerable to an external shock than the simpler ecological diversity of savannahs and grasslands."
The conlcusion also got me thinking, noting that the problem with the use of all the scientific models in finance is that when they're used in the way they are they effect the world they're modeling, something the model does not take into account (in doesn't need to when it's just being used to examine/understand the biological world). "Donald MacKenzie of Edinburgh university says the real problem with models is that bankers tend to view them as 'cameras' that capture how the world works, like the camera that might photograph a physics experiment. Instead, he argues, they should be viewed as 'engines' - since the presence of a model tends to change and drive market behaviour in a way that makes it impossible to assume that the past can predict the future."
Tags: economics, finance, science
So I just got done reading Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
, which I'd highly recommend if you'd like to get a better sense of how we got to where we are with the economy. There are a ton of quotes I'll probably share over the coming days (I love that Kindle just sticks them online for you), but I found the following paragraph especially striking. As background, at one point, about a year or two ago I believe, there was a chance that a huge number of CDOs would be dropped on the market at the same time, finally giving people a "true" price.
That threat sent shock waves through the market. Nobody had ever tried to sell that many CDOs or mortgage bonds in public before. A fire sale of that kind threatened to produce something the CDO world had never seen before: "true," undeniable market prices. In theory, that promised to be a very healthy, long-term development. After all, the bankers who had invented structured finance had always claimed to be upholding the virtues of free markets and rational pricing. They were supposed to like transparency. In actuality, though, the prospect of an open auction had terrifying short-term implications. Even at the best of times, forced sales hardly achieve good prices, and by mid-June, conditions in the mortgage market were getting worse by the day.
It's just amazing. Those that espouse the values of free markets were doing their best to ensure that CDOs were anything but that.
Tags: books, economics, finance
A few weeks ago there was a New Yorker article that chronicled the eight days leading up to and after the collapse of Lehman Brothers (as usual they've decided to only offer the abstract to non-subscribers unfortunately). Since I mentioned my penchant for process stories, it should come as no surprise that I quite enjoyed this one. The highlight, though, might have been this quote from a treasury official that basically boils the whole thing down to just a few sentences:
The treasury official described the situation: "Lehman Brothers begat the Reserve collapse, which begat the money-market run, so the money-market funds wouldn't buy commercial paper. The commercial-paper market was on the brink of destruction. At this point, the banking system stops functioning. You're pulling four trilliout of of the private sector" -- money-market funds -- "and giving it to the government in the form of T-bills. That was commercial paper funding GE, Citigroup, FedEx, all the commercial-paper issuers. This was systemic risk. Suddenly, you have a global bank holiday."
Tags: economics, finance, history
The idea of finance, as explained by this post from The Baseline Scenario (which I'm now subscribed to) is pretty simple:
The financial sector connects savers and borrowers - providing "intermediation services". You want to save for retirement and would obviously like your savings to earn a respectable rate of return. I have a business idea but not enough money to make it happen by myself. So you put your money in the bank and the bank makes me a loan. Or I issue securities - stocks and bonds - which you or your pension fund can buy.
What happens when you put a lot of money in one place, however, is quite a bit more complex and that's what the author tries to explain. The more I read this stuff, the more I think we're bound to swing back to the simplicity of something like peer-to-peer lending.
Tags: economics, finance, history
Felix Salmon offers a take on the financial crisis I hadn't heard (or thought of) before:
One of the themes of my talk was that it wasn't an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds. Investors didn't want risk, and investment banks made billions of dollars, during the boom, by waving their magic securitization wands and seemingly making that risk disappear.
As usual, I don't really know enough about this stuff to comment with any sort of intelligence, but it's an interesting angle.
Tags: economics, finance
Remember a month ago when there were rumors that BusinessWeek was going to sell for a dollar and everyone had some brilliant idea of what they should do with it? Well, turns out things aren't quite so cut and dry (which I suspected, as I worked for a magazine in a similar position, albeit with far less liability). Anyway, the magazine has $40 million in subscription liabilities, which Felix Salmon was kind enough to define:
What's a subscription liability? It's basically all the money which BusinessWeek has already been paid, in subscription revenues, for magazines it has yet to deliver. It's a liability because if it can't deliver the magazines, BusinessWeek would have to refund its subscribers their money, or somehow try to fob them off with an equivalent product.
Yet another collision of business reality and media punditry.
Tags: business, finance, magazines, media
I was going through some emails this evening and reading the comments on my disintermediating banking post. One comment in particular, by Jeremy, stuck with me: "Well, it'd be hard for the average consumer to evaluate default risk wouldn't it? Unless we want to go back to the rating agencies...and we all know how well that ended up..." Anyway, I was thinking about this and I wonder if that's not the sort of thing you could crowdsource? I mean basically, as I understand it, a rating is a subjective thing, so couldn't you just ask enough folks and average out their replies?
Again, this is an example of a subject I don't actually know anything about, so someone who does feel free to smack me down in the comments.
Tags: crowdsourcing, finance
I've become pretty fascinated by the idea of disintermediating banking lately. It's clear that the current system is broken and it's also clear that the need for capital is not going away, so something's got to give. Felix Salmon, as I've mentioned in the past, clearly thinks a big part of it is disintermediation. He wrote this in a post today about his anger with community banks not lending money:
I wish these loans could be disintermediated somehow: I'm sure there are lots of Americans -- even Americans who know how to underwrite loans -- who would love to get 2 percentage points over prime on $35,000, spread over six years. (Prime is currently 3.25%, and almost certainly won't go any lower; that puts a floor of 5.25% on the interest that these loans throw off. Try getting that from a CD.)
Certainly sounds right to me. Clearly there is risk here, but with risk comes reward (in this example 2 percentage points over prime). The thing is, I don't understand the banking system well enough to know why something like this isn't happening. Can anyone fill me in?
Tags: banking, community, finance
In case you're playing along at home, looks like Paul Krugman responded to the Duncan Watts article I posted about yesterday. Though he doesn't call out or link to the article, he pretty much shits on Watts' main thesis: "So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there's no way to make this automatic."
A few things on this unrelated to economics: First, I LOVE how Krugman makes internet jokes. It's so awesome that a nobel-winning economist writing on The New York Times includes FAIL (or all your base, which was a recent headline). Second, it's kind of weird that he doesn't even mention Watts article, which it seems clear he is responding too ... Maybe he's not? Three, have I mentioned the internet is awesome lately? How cool is it that this kind of debate can just spring up.
Tags: economics, finance
When I was out in Montana last month I had a conversation about how the state had been hit by the economy. As Scott, who runs the Entertainment Management Program at University of Montana explained, it actually hadn't been slammed as badly as the rest of the country since many of its banks were local and hadn't made the same sort of aggressive loans that the big banks had.
I kind of took it all with a grain of salt until this weekend when I read the interview with an anonymous hedge fund manager. Anyway, all of a sudden it popped back in my head. Could it really be possible that this was a problem focused around the big states that held the big banks? As I thought about it some more I realized that most of the stories I had read focused on Florida, California, Ohio and a few of the other biggest states in the country, not necessarily those smaller population ones in the middle of the country. But still, it didn't all add up and I was skeptical.
Then yesterday my friend Justin forwarded me along a New York Times article that pretty much spelled out the big bank/little bank divide. The article explains, "Though they greatly outnumber the national and regional banks, community banks have barely registered in any of the fallout from the credit crisis, in part because they hold less than 10 percent of the $13.8 trillion in bank assets nationwide." It even spells out the geography issue:
The 50 or so bank failures have been largely clustered in a few states, like Florida, Arizona and California, where the bursting housing bubble had the greatest impact.
In states like Indiana, where property values never soared, community banks have been rock solid. The last failure in the state was in 1992.
Anyway, be curious to know if anyone has more info on this one. I guess I'm just really surprised I haven't read more about this.
Tags: economics, finance, housingcrisis
Spending the weekend down in West Virginia and yesterday we stopped by a bookstore for some coffee/reading time. I picked up a copy of N+1 which I had read online before, but never on paper. Anyhow, still getting through it, but really like this two part interview with an anonymous hedge fund manager. Generally it gave some real insight into how we got to where we are and also provided some nice nuggets of general wisdom, like this one explaining why he doesn't think people trained in finance necessarily make the financiers:
Because I think that in the end the way that you make a ton of money is calling paradigm shifts, and people who are real finance types, maybe they can work really well within the paradigm of a particular kind of market or a particular set of rules of the game--and you can make money doing that--but the people who make huge money, the George Soroses and Julian Robertsons of the world, they're the people who can step back and see when the paradigm is going to shift, and I think that comes from having a broader experience, a little bit of a different approach to how you think about things.
Anyway, the whole thing is worth a read: Part 1 and Part 2.
Tags: economics, finance
I remember when someone first said this to me, I was in college and DJing and the bartender was giving me financial advice. His argument was that if you pay your balance every month in full then you never build any credit. I remember thinking it was absurd at the time (and told him that), but it's stuck with me. Anyway, after having the conversation again a few weeks ago and remembering it this morning I decided to check the internet for the answer.
Not surprisingly (to me), the answer appears to be no. Paying off your bill every month in full does build credit since the company is floating you whatever amount you spent for around thirty days (until your statement and due date arrive). Anyway, this is neither here nor there, but just thought it was a useful piece of knowledge (that miraculously doesn't seem to be on Snopes.
Tags: creditcards, finance
Back in October, This American Life did a great episode explaining the economy in plain english. I know for me this is still what much of my understanding is based on. Well, the guys behind that one came back and did a refresh, this time focusing on banks. Once again it's well worth a listen (it's an hour).
Generally I think there's a dearth of this kind of information (which they actually bring up at the beginning of the show). I suspect it's because there aren't that many people with a clear understanding of what's going on (I always think back to the Einstein quote, "If you can't explain it simply, you don't understand it well enough."). While we're on the topic of simple financial explanations, I also highly recommend checking out the Marketplace Whiteboard video series. It's just a dude in front of a whiteboard explaining things simply enough that I can understand it. (Oh, and one more good one: The last section of this TAL episode is an awesome explanation of why everyone is talking about John Maynard Keynes.)
Tags: economics, finance
Michael Lewis has a really good portfolio piece outlining the financial crisis and specifically telling the story of Steve Eisman whose firm FrontPoint Partners put their money where their mouth was and shorted just about everything mortgage related.
Anyway, the article is a well written narrative through Eisman's eyes as he uncovered just how bad each level of the mortgage crisis actually was. The kicker quote to me, though, came as part of a conversation with John Gutfreund, former boss of Solomon Brothers who brought the company public (also prominently featured in Lewis's Liar's Poker).
Anyway, here's what Lewis wrote: "He thought the cause of the financial crisis was 'simple. Greed on both sides—greed of investors and the greed of the bankers.' I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed." This is actually something I've thought a great deal about as I've seen people blame greed for the crisis. Whoever sets regulations needs to understand that people will be greedy and deal with it accordingly. The fact that incentives for greed were put in place, which Lewis outlines, is the fault of the government. Or, as Eisman puts it in one of the turning points of the story when he realizes that the investment banks were actually creating more crappy bonds with his short money, "This is allowed?"
Tags: economics, finance
AdWeek's Brian Morrisey spoke to Google's chief economist Hal Varian about, not surprisingly, search marketing. The real nugget from Varian comes towards the end when he says, "Marketing is the new finance ... Just as finance has become more quantitative because of what happened in the 1970s, you'll see marketing do that."
I've been thinking a lot about this lately and I think he's absolutely right. I keep trying to write all the reasons why, but I'm feeling particularly inarticulate today, so it will need to wait until another day.
Tags: finance, google, marketing
Marc Andreessen asked some of his friends who do this type of stuff to explain exactly how a Microsoft/Yahoo! hostile takeover attempt might play out. It's a great and detailed explanation of how things might play out over the next few months.
Tags: business, finance, microsoft, yahoo
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