Comments on: The Magnetar Trade

By: Critical Transitions in Markets and Macroeconomic Systems at Macroeconomic Resilience

Thu, 29 Jul 2010 09:27:55 +0000

[...] an earlier post, I analysed how the infamous Magnetar Trade could be explained with a framework that incorporates [...]

By: Norm Cimon

Norm Cimon — Fri, 16 Apr 2010 22:22:41 +0000

And how about the leser ones? The estimated number of small to mid-size banks with a liquidity crunch is staggering. What about them?

It took a few years of depression-era pain for the full weight of the economic downfall to become apparent in the 1930s. In the current downturn the jobs needle hasn’t budged for months now, with the actual number of unemployed/underemployed approaching 17% and holding. Where we go from here is hard to fathom if this lasts much longer. It’s easy to predict, however, that the economic pain will lead to more political upheaval with the public lashing out at the most visible symbols of power.

By: shrek

shrek — Tue, 13 Apr 2010 22:25:45 +0000

Another great set of articles. The further we get from the “end” of the crisis the more I agree with Taleb that everyting we have done is in the exact opposite direction. Instead of getting away from credit markets everyone thinks that the solution is head right back into credit with a vengence. I suspect alot of it has do with the implied government gurantee of debt and weariness of equity investments. This smells of really bad logic. Does anyone really think the government will beable to hold this siutation together forever? History would say otherwise. Governments wont beable to save big banks forever

By: admin

admin — Tue, 13 Apr 2010 20:15:09 +0000

David – Thanks. I haven’t read Gillian Tett’s book but your account makes sense. If JP was not willing to hold onto the super-senior debt, it would not be able to continue with its CDO issuance business unless it got someone to insure it (typically AIG or the monolines). This would leave it at a serious disadvantage compared to the competition. I’ve analysed UBS’ shareholder report on their losses at the bottom of the 11/6/09 entry which explains the typical motivation of the banks pretty well. Else, a much more concise version of that first post can be found here http://www.macroresilience.com/2010/01/06/implications-of-moral-hazard-in-banking/ .

Regarding Modigliani Miller, the math really isn’t that important in understanding it. In fact, the John Burr Williams version quoted in that article captures the essence of it without using a single equation!

By: David Larsson

David Larsson — Tue, 13 Apr 2010 16:36:36 +0000

Thanks for this. I listened to the “This American Life” summary of the ProPublica article, and wondered whether TAL’s “The Producers” analogy was facile; it’s good to see rigor applied to the discussion, even if I can’t really grasp all that’s involved. I even went back and read the 11/6/09 entry, and the Miller Modigliani article in the footnotes (until I hit the equations page, at which time, my inumeracy got the best of me). Here’s my question for admin: You write above that “bank demand for super-senior tranches is a logical consequence of the cheap leverage that they are afforded via the moral hazard subsidy of the TBTF doctrine.” In Gillian Tett’s book _Fool’s_Gold_, J.P. Morgan’s team is portrayed as working hard to rid itself of super senior debt, and suffering in the marketplace because its competitors were happy to keep it on theirs on their balance sheet. Do you have any thoughts about this portrayal of the J.P. Morgan?

By: Norm Cimon

Norm Cimon — Tue, 13 Apr 2010 04:47:21 +0000

The inability or, worse, unwillingness of the financial houses and the bankers to actually track the swill that had been stuffed into these derivatives is disgusting. In an age when Google and Amazon can minutely detail your preferences through the creation of a proper data model, these so-called professionals come across as lazy and incompetent for not doing so.

Of course, none of the criminal behavior – and that’s what many of the strategies associated with shorting a long position because of the money that can be made appear to be – could have happened if this had actually been done. That wouldn’t be any fun would it?

Chaos indeed. In case no one’s bothered to think this through, these markets are riven with non-linearities that insure the collapse of any effort to model them statistically, short of actually tracking what’s in this junk.

The risk equations are garbage. Books like The Black Swan barely touch on this. This is completely and absolutely unsustainable. It’s easy to predict that if these markets are not taken apart, they will collapse again.

By: Alex Golubev

Alex Golubev — Mon, 12 Apr 2010 15:07:31 +0000

Right on. Witch-hunts are still a very popular form of self-deception. The chaos of incentives and unintended consequences is much harder to face. Keep the eye on the prize – leverage.