I really don't like HFT (except for splitting large orders into smaller ones), but the only problem with CDOs and CDSs is that they are not exchange traded (therefore not liquid and not transparent enough). They are perfectly reasonable and interesting products that provide obvious value to society by transforming risk.
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GAF, I hate how Finance and the global markets work
- Thread starter Sanky Panky
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I really don't like HFT (except for splitting large orders into smaller ones), but the only problem with CDOs and CDSs is that they are not exchange traded (therefore not liquid and not transparent enough). They are perfectly reasonable and interesting products that provide obvious value to society by transforming risk.
Sanky Panky
Banned
One thing I forgot to add is that the big crashes in Finance happen because of extremely low probability events not factored in by investors (or by programs in more recent times).
The 1929 market crash did not happen because of one isolated event, but because of global events that all happened at once.
I don't want to equate now to 1929, but everything is lining up around the wolrd for another big shock. I don't think it's a matter of months either, but weeks (if not days). August is a big month for Spanish/Italian bond auctions, and September is do or die for the Euro, the Germany ruling on the ECM. The German supreme court won't want to go down in history as the responsible ones for breaking up the Euro, but things are getting down to the wire.
As it is, Germany will not let Draghi/ECB directly buy sovereign bonds. We'll see how that goes.
The 1929 market crash did not happen because of one isolated event, but because of global events that all happened at once.
I don't want to equate now to 1929, but everything is lining up around the wolrd for another big shock. I don't think it's a matter of months either, but weeks (if not days). August is a big month for Spanish/Italian bond auctions, and September is do or die for the Euro, the Germany ruling on the ECM. The German supreme court won't want to go down in history as the responsible ones for breaking up the Euro, but things are getting down to the wire.
As it is, Germany will not let Draghi/ECB directly buy sovereign bonds. We'll see how that goes.
The model works, until it doesn't...... Which is what lead to many of the problems in 2008. The rocket scientist never seem to remember that just because something won't happen 99.99% of the time, it still is not zero, and when it happens, its usually far worse than the model predicts, because your assumptions about volatility, correlations, etc. break down at the extremes....
Hari Seldon
Member
Interesting side note, I heard a speech once from one of the key scientists on the DOE side concerning Yucca Mountain (the long term nuclear storage site). They had to calculate probabilities out to absolutely ridiculous lengths (10,000 years). Imagine if the financial world had to operate under a standard that extreme. If you are too big to fail, you can only fail once every 10,000 years, and you must provide the analysis to the government for review and approval. After all, a leak at Yucca mountain would be far less catastrophic than a global economic collapse.
But the economic catastrophe is just The Market (blessed be He) in action.
WeAreStarStuff
Member
Well this would certainly curb financial corruption here:
Iran sentences 4 to death in $2.6B fraud case.
An Iranian court has sentenced four people to death and given two more life sentences on charges linked to a $2.6 billion bank fraud described as the biggest financial scam in the country's history, an official said Monday.
The trial, which began in February, involved some of the country's largest financial institutions and raised uncomfortable questions about corruption at senior levels in Iran's tightly controlled economy.
More here:
http://www.cbsnews.com/8301-501713_162-57482972/iran-sentences-4-to-death-in-$2.6b-fraud-case/
Iran sentences 4 to death in $2.6B fraud case.
An Iranian court has sentenced four people to death and given two more life sentences on charges linked to a $2.6 billion bank fraud described as the biggest financial scam in the country's history, an official said Monday.
The trial, which began in February, involved some of the country's largest financial institutions and raised uncomfortable questions about corruption at senior levels in Iran's tightly controlled economy.
More here:
http://www.cbsnews.com/8301-501713_162-57482972/iran-sentences-4-to-death-in-$2.6b-fraud-case/
And just in time to coincide with this thread, another HFT firm has a computer glitch resulting in $440 million in losses and a potential bankruptcy...
Errant Trades Reveal a Risk Few Expected
Trying to Be Nimble, Knight Capital Stumbles
Knight Capital Says Trading Glitch Cost It $440 Million
Errant Trades Reveal a Risk Few Expected
Trying to Be Nimble, Knight Capital Stumbles
Knight Capital Says Trading Glitch Cost It $440 Million
bodyboarder
Member
Live by the sword, die by the sword.
D
Deleted member 1235
Unconfirmed Member
enjoying the read as well.
not much to add, as apart from having general good budgeting and financial sense I don't really understand the complex details.
I do wonder though, how far off are computers from just replacing traders? can I just design a computer, kind of like a poker bot, to play the markets 'semi agressively' and work on all the data it has recorded?
I sometimes have awesome tech dreams of hooking up a PC to do just that.
I imagine the markets like an arms race, everyone just gets better and better until it's freaking impossible to move, because everything has been though of already.
question, if you're so sure, can you somehow place trades to make huge bank of this event? I remember a guy did this in 2008 and got hauled in front of a judge in US. can't remember the details exactly but he spoke so softly nobody could hear him give testimony. made me laugh.
not much to add, as apart from having general good budgeting and financial sense I don't really understand the complex details.
I do wonder though, how far off are computers from just replacing traders? can I just design a computer, kind of like a poker bot, to play the markets 'semi agressively' and work on all the data it has recorded?
I sometimes have awesome tech dreams of hooking up a PC to do just that.
I imagine the markets like an arms race, everyone just gets better and better until it's freaking impossible to move, because everything has been though of already.
Sanky Panky said:
question, if you're so sure, can you somehow place trades to make huge bank of this event? I remember a guy did this in 2008 and got hauled in front of a judge in US. can't remember the details exactly but he spoke so softly nobody could hear him give testimony. made me laugh.
WeAreStarStuff
Member
Yes, you can make tremendous financial gains during downward swings of the markets, by shorting, investing in favorable options contracts, investing in inverse ETFs/Indexes, and etc. It's actually an honest way to see if someone truly believes the market will go down, because if they do then I say short or shutup.
Edit: Sometimes there are temporary bans on shorting during tumultuous downward environments; several countries have done this in the past and continue to do so.
bodyboarder
Member
Of course. Same as if you think something is going to increase. Maybe insider trading?
GuyIncognito
Member
While being more liquid obviously would be better than otherwise, that's definitely not the biggest problem with CDO's. Also, you should make a distinction between the two, as some CDS is actually fairly liquid and have reasonably well-defined markets (though becoming decreasingly so every day with all the regulation).
Agree with your second point - nothing wrong with the securities themselves and they do serve a purpose. The problem in the financial crisis wasn't the securities themselves, but they way in which they were used, i.e. way too much leverage irresponsibly taken on and investors not doing proper work to understand collateral and risk of the cdo's (because most of them were complete shit towards the end but investors kept piling on)
GuyIncognito
Member
You should read up on james simons and the renaissance medallion fund. Almost entirely automated computer-driven investment fund that's made like 35%/yr returns for a couple decades
Sanky Panky
Banned
Yeah I can sell S&P futures, buy credit default swaps, short currencies like the Euro which are correlated with the US market, etc. The problem is knowing WHEN it will happen, and being able to sit through the swing until then.
The guy that did this in 2008 knew that the mortgage situation was unsistainable, so he started loafing up on credit default swaps for all the mortgage backed securities. This was one of the better ways to bet against mortgages, because if these mortgages started defaulting, the MBSs would decrease in rating, and what people would pay for insurance (the credit default swaps) would go up a lot. Buying credit default swaps is a good way to "short" bonds, because you are betting that the drecit quality will go down.
The guy almost lost his shirt because he started buying in 2006, so his fund was having negative returns. Investors wanted to run for the hills. He somehow stuck it out, and banked when shit hit the fan.
BTW, a mindblowing view on the derivatives that can fuck up the system. If you ever wonder why the government is so involved in propping up the market, this is the reason. I will update the OP with it.
http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
Anyone read Ann-Katherine Barnett Hart's thesis on the CDO-meltdown? It's really good, and incredibly good for a bacherlor thesis, even for Harvard.
PDF-link
Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead!
PDF-link
Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead!
Sanky Panky
Banned
Sadly one thing I don't follow much anymore is politics. I know Dodd-Frank had some language in it to regulate derivatives, and that there have been a bunch of bills to try to water down the derivatives part. The lobby must be huuuuuge on this one, and the public does not care much for it. Even if something passes, the CFTC doesn't have the money to do it's job... which is to try to look over the biggest shadow market in the world. I'll have to read up this.
I don't even think investors themselves know how to properly model default/prepayment rates and asset values for all these derivatives at this point lol
Keen said:
Good find, gotta read up on this!
I need to read more about derivatives as well! It's pretty fascinating.
It was recommended by one of our thesis advisors. Finished up a MSc in Business and Economics in the spring.
Thanks. Added to my to-read list.
bodyboarder
Member
Must be smart, I know I'd be hard pressed to defer Harvard.
Thanks, subbed.
Oh yeah, here is a great breakdown of the paper, very easily digestible. Dig in.
http://www.businessinsider.com/anna-katherine-barnett-hart-cdo-market-2010-3?op=1
http://www.businessinsider.com/anna-katherine-barnett-hart-cdo-market-2010-3?op=1
Yeah this is a good point. I should look into it too.
I'd recommend people pick up the Big Short if they want something a bit more, well, fun than a Harvard thesis. It's a very quick and entertaining read
Sanky Panky
Banned
Some light-hearted fun of how the Fed and Treasury are in bed with big banks and institutions...
Standard Chartered begins fightback on Iran allegations
http://finance.yahoo.com/news/standard-chartered-questions-york-action-011643637.html
Some excerpts...
Basically the bank was expecting the Fed and regulators to secretely come to settlement, without much fanfare (usual business), but this guy Lawsky called them out publicly for doing fraud.
The Fed and Treasury were also surprised that someone would actually call a bank out. I like that guy.
Standard Chartered begins fightback on Iran allegations
http://finance.yahoo.com/news/standard-chartered-questions-york-action-011643637.html
Some excerpts...
Basically the bank was expecting the Fed and regulators to secretely come to settlement, without much fanfare (usual business), but this guy Lawsky called them out publicly for doing fraud.
The Fed and Treasury were also surprised that someone would actually call a bank out. I like that guy.
Liberty4all
Banned
A great movie for the layman going into the workings of how some of these financial firms operate:
The infographic is a bit misleading as it's showing the gross exposure rather than net which is likely far smaller.
Here's a blog that explains the difference: http://ftalphaville.ft.com/blog/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/
Here's an example of how big of a difference this can make in practice (Greek default):
Gross position: 69b
Net position: 3b
http://ftalphaville.ft.com/blog/2012/03/20/931101/just-to-be-pedantic-3-1bn-net/
Sanky Panky
Banned
^^^ Fair point. We don't know the net positions of these banks.
With that said, net positions on +$225 TRILLION are probably nothing to bark at.
With that said, net positions on +$225 TRILLION are probably nothing to bark at.
WeAreStarStuff
Member
More evidence of the absolute corruption of our system. So infuriating.
Goldman Sachs won't face U.S. charges for mortgage securities.
WASHINGTON The Justice Department said it would not pursue criminal charges against Goldman Sachs Group Inc. or its employees related to allegations by a Senate panel that the bank deceived investors and Congress about its activities in the subprime mortgage market.
After an exhaustive review that began last year, investigators concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time, the Justice Department said in a statement released Thursday night.
The officials said they could change their minds if any additional or new evidence emerges.
The investigation by officials from the Justice Departments Criminal Division, the U.S. attorneys office for the southern district of New York, the FBI and other agencies began after a scathing report regarding Goldman was issued in April 2011 by the Senate's Permanent Subcommittee on Investigations.
The panel, which conducted a bipartisan, two-year probe into the origins of the financial crisis, concluded that Goldman was a major culprit.
The subcommittees report, based on internal memos, emails and interviews with employees of financial firms and regulators, said Goldman profited from the crisis by betting billions of dollars against the mortgage market and then misled the banks clients and lawmakers about its activities.
The committees investigation included a high-profile hearing in which senators grilled Goldman Chief Executive Lloyd Blankfein. He testified that the bank had not consistently tilted its own investments heavily against the housing market, also known as having a net short position, as it was selling mortgage-related securities to its clients.
The subcommittees report said Goldmans own financial records and internal communications directly contradicted Blankfeins denial.
Goldman had strongly challenged the subcommittees findings, saying the company had acknowledged being intermittently net short but never had a "massive net short position."
On Friday a company spokesman said, We are pleased that this matter is behind us."
But Sen. Carl Levin (D-Mich.), the subcommittees chairman, said he stood by his panels findings.
Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs actions were deceptive and immoral, Levin said.
The lack of prosecution by federal officials highlighted the need to prevent banks from convincing regulators and Congress to water down new rules in the 2010 financial reform law designed to prevent another crisis, Levin said.
The Justice announcement came after Goldman reported in a regulatory filing Thursday that the Securities and Exchange Commission had decided not to file charges against the firm over a $1.3-billion subprime mortgage portfolio. The SEC was investigating Goldmans disclosures about the portfolio, which was offered to investors in 2006.
In 2010, Goldman agreed to pay pay $550 million to settle SEC allegations that the bank misled investors who bought some mortgage-related securities.
http://www.latimes.com/business/mon...estigation-mortgages-20120810,0,6319671.story
It's unbelievable. Sell products to your clients while shorting the very underlying assets you are telling your clients to buy! This shit needs to end. What will it take to make the American people pay attention?!
Goldman Sachs won't face U.S. charges for mortgage securities.
WASHINGTON The Justice Department said it would not pursue criminal charges against Goldman Sachs Group Inc. or its employees related to allegations by a Senate panel that the bank deceived investors and Congress about its activities in the subprime mortgage market.
After an exhaustive review that began last year, investigators concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time, the Justice Department said in a statement released Thursday night.
The officials said they could change their minds if any additional or new evidence emerges.
The investigation by officials from the Justice Departments Criminal Division, the U.S. attorneys office for the southern district of New York, the FBI and other agencies began after a scathing report regarding Goldman was issued in April 2011 by the Senate's Permanent Subcommittee on Investigations.
The panel, which conducted a bipartisan, two-year probe into the origins of the financial crisis, concluded that Goldman was a major culprit.
The subcommittees report, based on internal memos, emails and interviews with employees of financial firms and regulators, said Goldman profited from the crisis by betting billions of dollars against the mortgage market and then misled the banks clients and lawmakers about its activities.
The committees investigation included a high-profile hearing in which senators grilled Goldman Chief Executive Lloyd Blankfein. He testified that the bank had not consistently tilted its own investments heavily against the housing market, also known as having a net short position, as it was selling mortgage-related securities to its clients.
The subcommittees report said Goldmans own financial records and internal communications directly contradicted Blankfeins denial.
Goldman had strongly challenged the subcommittees findings, saying the company had acknowledged being intermittently net short but never had a "massive net short position."
On Friday a company spokesman said, We are pleased that this matter is behind us."
But Sen. Carl Levin (D-Mich.), the subcommittees chairman, said he stood by his panels findings.
Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs actions were deceptive and immoral, Levin said.
The lack of prosecution by federal officials highlighted the need to prevent banks from convincing regulators and Congress to water down new rules in the 2010 financial reform law designed to prevent another crisis, Levin said.
The Justice announcement came after Goldman reported in a regulatory filing Thursday that the Securities and Exchange Commission had decided not to file charges against the firm over a $1.3-billion subprime mortgage portfolio. The SEC was investigating Goldmans disclosures about the portfolio, which was offered to investors in 2006.
In 2010, Goldman agreed to pay pay $550 million to settle SEC allegations that the bank misled investors who bought some mortgage-related securities.
http://www.latimes.com/business/mon...estigation-mortgages-20120810,0,6319671.story
It's unbelievable. Sell products to your clients while shorting the very underlying assets you are telling your clients to buy! This shit needs to end. What will it take to make the American people pay attention?!
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