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Showing posts from August, 2009

Toxic finance

Munchau today in the FT talks about Toxic Finance and a new research paper writing by Pasini et al (Dauphine, Paris). It is about 120 pages and goes into details of CDO/CDS and the whole alphabet soup. I will be reading this in great detail in the days to come. If anyone fancies following me in this endeavor, please help :)

Software for the non-software girl

In a recent conversation with my sister, she mentioned her semi-annual “let’s look at the direction of your career” meeting with her boss, and the fact that she would need to make a decision between the “management” and “specialist” track. My sister works for a rather typical subsidiary of a multi-national conglomerate with its shares of mergers, shake-ups and spin offs—so her two main concerns were 1) job security 2) the ability to advance.

I told her to definitely go for the specialist track. When push comes to shove, the superfluous management layer is the easiest to trim. Not only is “managing people” highly over-rated (you become the person responsible for those boring-as-shit employee performance reviews); it is also highly un-differentiated. Everybody claims they can manage people; whereas, in my experience, the most effective managers were formerly People Who Could Get Shit Done. This past experience tends to make the former Person Who Could Get Shit Done good at detecting oth…

Naked CDS and Shorts

I have talked about Naked CDS many times on this blog. Legislation is now being proposed to curb the use of these instruments.

One of the arguments coming from the crowd that believes all legislation is bone-headed is that "would you ban naked/covered shorts as well?". I believe the two constructs are not equal and should not be compared.

Naked CDS is 4 times the non-naked volume. In other words when a debt defaults the payments needs to be 400% of the nominal value of the debt (assuming all debt is hedged).

Let's say the short interest in a stock is 40% (high). When the stock goes to zero with default on debt, the cash that needs to be ponied up for the short portion is 40% of the nominal of the equity.

If debt is 1 and equity is 1 then the impact of a naked CDS is 10 times bigger.

Naked CDS truly are dangerous instruments that should be heavily regulated.

Class Traitor?

Little hussy with no sense of family identity or loyalty to “her people”

This is probably one of the worst things you could imply about a person in the American South. A recent, inconsequential Facebook exchange, involving a reflection on my middle-class upbringing, provoked a most unexpected, vituperative and, thankfully, private--or else all my Facebook “friends” would be having a good laugh at me now--email. The offended family member wondered how I could consider an upbringing that included trips to Europe “before adulthood!” “exclusive” private schools and membership “from both sides of my family!” in “the most exclusive country club in Atlanta” middle class?

My entire life I considered myself a member of the middle class. Was this a false delusion? Was I, in fact, a class-traitor--a phony and a hypocrite who wouldn’t recognize the American middle class if it were two feet from my nose?

Why middle class? To begin with, in the US, you can’t be upper class without money. Whatever fin…

The Financial Crisis for Dummies: Money

Money, it took me 37 years to make a bunch of it and it took me 40 to "get it". In fact I am not sure I still completely "get" money. I mean that in the theoretical sense. After researching a bit I came to the conclusion that very few people actually understand money the way it works today. I previously discussed this here.

A definition of money
The first attribute of money is as a medium of exchange to make an economy churn. It is very much the oil in the economic engine. The meeting of neeeds is a rare occurence in a economy, but with the intermediation of money, from good to money to good, you can match disparate peoples, specialization occurs because money exists. Without money there is no economy but a limited barter economy. It also serves as a store of value. "Going to cash" is what everyone does when the markets go down because cash doesn't lose its numerical face value. This leads to the liquidity preference that Keynes talks about. Fi…

Second derivatives

Second derivatives is about acceleration in classical physics. The second derivative of position is the force that accelerates you, in most cases gravity.

I am sick and tired of reading about positive second derivatives as a main economic indicator. As if there was the equivalent of gravity in economics.

Case in point, the jobs report. The number of jobs lost last month was less than the month before.

The optimist reading is that there is a positive force at play, there is an inflexion point: buy!
A optimist-pessimist reading says that we are losing less jobs, but we are still losing jobs: economy is still deteriorating (but less fast than last month): hold!
A pessimist reading says: the economy was in a bad shape and is now in a worse shape with less jobs to go around: sell!

Naive optimism and greed is what got us in the mess to start with. Endemic optimism is a strength of the american economy and it is also its achilles heel. This dictat of optimism where things always go up (n…