Showing posts from April, 2010

Keep the "crazy" under control

I have an (almost) eleven-year old girl and three boys, twins aged 7 and a 3-yr old. Honestly, most the time, I feel like Lynette from Desperate Housewives. Hearing my 3-yr old son sing “I love my mudder” at breakfast in the morning or the evening cuddle and prayers with the children—the one moment of the day when they resemble anything close to angelic--are all too brief. Mostly my day is like this:

Go onto the Internet to see if the crusty raised bumps in a circle on Twin A’s arm are ringworm. Educate myself on what ringworm is and how do you get rid of this. It turns out ringworm is a fungus and an over-the-counter antifungal cream at the pharmacy will take care of this. Of course you have to remember to put it on every morning and night for about 2 weeks to get results, in the meantime, he’s developed a new “ringworm” on his leg. Crap! More weeks of remembering to put the ringworm cream on Twin A, especially now that we are in later Spring, and I have to remember to put sunscreen …

GS and systemic instability: monetary theory.

One of the fallouts I expect from the ongoing GS vs the rest of the world saga, is a huge inquiry in the mechanisms of modern debt creation and a revival of modern monetary theory.

Naked CDS or the collapse of the quantum wave

In theory you can price a CDS by knowing the probability distribution of the underlying security. It can be a bell curve or standard distribution or it can be anything. The point is that we have historical data to generate a distribution, however sparse, and in retrospect incorrect. One of the academic criticisms to the current pricing techniques is that they assumed distribution curves that did not account for fat tails. A spot price accounts for the future rate of defaults, your premium has got to cover that and your profit.

But essentially you are still speculating about the future by assigning probabilities to differents "states". Paulson knew that the weight assigned to "meltdown" was too low, he could see it coming. The discount…

SEC vs Goldman, the saga begins

It is of course all over the news. The US has decided to sue Goldman over the Abacus deals. I had predicted that one for a long time. The Abacus series was a bunch of naked CDS, they are finally attracting the spotlight as the nefarious instruments they are.

A primer on naked CDS and CDS

A CDS is an insurance contract on debt. If you have emitted debt (you are a bank or a particular lending by buying bonds) you can protect against the default of the payer by buying a CDS. If default occurs then your counterparty owes you the amount of the debt, usually to be settled in cash.

The Credit Default Swap or CDS is used everywhere in the economy. It is used as a way for companies to manage their operations. Risk transfer through CDS is a valid and useful economic tool. It has it's uses in everyday economic activity. It transfers risk. That is a good thing. So in the case of housing and sub-prime this reads that a banks can protect, dollar for dollar, its capital exposure to sub-p…