Public-Private Investment Program Almost Ready to Begin - NYTimes.com
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.
The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.
In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."
Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html
See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs
Showing posts with label Treasury Secretary. Show all posts
Showing posts with label Treasury Secretary. Show all posts
Monday, October 5, 2009
Monday, March 30, 2009
Geithner Plan: The False Dichotomy of Alternate Choices
Based on Meet the Press and This week interviews of Mr. Geithner, nobody at the the treasury seems to have seriously raised to the Secretary's attention, the possibility of a less costly, surgical, and more effective alternative through market making as I have advocated.
The False Dichotomy of Alternate Choices. False dilemma.
I cry a river over this.
The False Dichotomy of Alternate Choices. False dilemma.
I cry a river over this.
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Sunday, March 29, 2009
Estimating Asset Costs for TARP/PPIF in a Market Making Framework & BICs - a knol by Phil Kongtcheu
Estimating Asset Costs for TARP in a Market Making Framework & BICs - a knol by Phil Kongtcheu
This article is a follow-up to the knol article "Fair Value Pricing, Government Market Making and TARP" and uses the concept introduced in the knol article " Introduction to Basis Instruments Contracts (BICs) for Mathematics, Finance, and Economics".
In this article we seek to estimate the proportion of assets ultimately held by the Government in a market making model, their cost and the parameters needed to make such estimates.
An important financial insight of this analysis is that we show that market making results in earning a spread that makes market making loss unlikely.
This article is a follow-up to the knol article "Fair Value Pricing, Government Market Making and TARP" and uses the concept introduced in the knol article " Introduction to Basis Instruments Contracts (BICs) for Mathematics, Finance, and Economics".
In this article we seek to estimate the proportion of assets ultimately held by the Government in a market making model, their cost and the parameters needed to make such estimates.
An important financial insight of this analysis is that we show that market making results in earning a spread that makes market making loss unlikely.
Tuesday, March 24, 2009
Geithner plan arithmetic - Paul Krugman Blog - NYTimes.com
Geithner plan arithmetic - Paul Krugman Blog - NYTimes.com
I agree with the subsidy argument made here to reject the Geithner plan but the example while at first very neat, nonetheless misses an element of investors preferences: many investors have already lost a lot and it is not unreasonable for them to demand more to risk what they've got left. Here is how it works:
Let's suppose Dr. Krugman's net worth is $100 million (including job security and reputation) and I say we flip a coin with equal probability of head and tail.
If it falls on head, Dr. Krugman wins and receives $1 billion; If it falls on tail, he loses everything he has got and pays out his net worth of $100 million. Will he take the bait?
I do not know the structure of Dr. Krugman's risk preferences but I am sure most people will not take it, even though their expected gain here would be $450 million.
This is what I call the fallacy of expectations based risk management. Many of the firms that go under in every financial crisis make the same mistake, often advised by very, very smart people. They make their investment decisions based on expectations profiles without full appraisal of the sustainability of downside scenarios that higher order metrics such as variance/volatility or above fail to capture. It seems a lot of very, very smart people out there are still making the same kind of intellectually cute but intrinsically flawed argument.
For this reason, I think the more simplistic example of my earlier post makes a more robust argument explaining the subsidy part of the plan.
I agree with the subsidy argument made here to reject the Geithner plan but the example while at first very neat, nonetheless misses an element of investors preferences: many investors have already lost a lot and it is not unreasonable for them to demand more to risk what they've got left. Here is how it works:
Let's suppose Dr. Krugman's net worth is $100 million (including job security and reputation) and I say we flip a coin with equal probability of head and tail.
If it falls on head, Dr. Krugman wins and receives $1 billion; If it falls on tail, he loses everything he has got and pays out his net worth of $100 million. Will he take the bait?
I do not know the structure of Dr. Krugman's risk preferences but I am sure most people will not take it, even though their expected gain here would be $450 million.
This is what I call the fallacy of expectations based risk management. Many of the firms that go under in every financial crisis make the same mistake, often advised by very, very smart people. They make their investment decisions based on expectations profiles without full appraisal of the sustainability of downside scenarios that higher order metrics such as variance/volatility or above fail to capture. It seems a lot of very, very smart people out there are still making the same kind of intellectually cute but intrinsically flawed argument.
For this reason, I think the more simplistic example of my earlier post makes a more robust argument explaining the subsidy part of the plan.
Monday, March 23, 2009
Geithner: My Plan for Bad Bank Assets - WSJ.com
Geithner: My Plan for Bad Bank Assets - WSJ.com
From what I understand from this piece, this plan deals with the capital structure of the funds that will purchase the assets, but not the mechanism through which the asset prices will be formed, i.e how the funds will price the assets...Umh...OK.
It seemed to me that the pb is not that there is no money out there, but that money does not want to touch those toxic assets and that the role govt in this is to come up with an efficient pricing mechanism that restores liquidity.
A few hours later,...
Well, in fact this plan is still a big unjustified subsidy to Wall Street compared to what I have proposed. To make it easy, consider this
Suppose you want to buy to buy a toxic asset T. You think that when you dispose of it in a year it will be worth $110. How much will you be willing to pay for it today? It all depends on the cost of borrowing. If you can get a 0% loan you can pay up to $110. If the interest rate is 10%, you will not pay more than $100 for T. So the lender who lends you money at 0% when the market on such loans is 10% is giving you a subsidy that you will share with the asset T seller. Furthermore lending such subsidized money to more than one potential buyer will ensure through competitive forces that the bulk of the subsidy is passed on to the seller. That's probably why Wall Street cheered today..
From what I understand from this piece, this plan deals with the capital structure of the funds that will purchase the assets, but not the mechanism through which the asset prices will be formed, i.e how the funds will price the assets...Umh...OK.
It seemed to me that the pb is not that there is no money out there, but that money does not want to touch those toxic assets and that the role govt in this is to come up with an efficient pricing mechanism that restores liquidity.
A few hours later,...
Well, in fact this plan is still a big unjustified subsidy to Wall Street compared to what I have proposed. To make it easy, consider this
Suppose you want to buy to buy a toxic asset T. You think that when you dispose of it in a year it will be worth $110. How much will you be willing to pay for it today? It all depends on the cost of borrowing. If you can get a 0% loan you can pay up to $110. If the interest rate is 10%, you will not pay more than $100 for T. So the lender who lends you money at 0% when the market on such loans is 10% is giving you a subsidy that you will share with the asset T seller. Furthermore lending such subsidized money to more than one potential buyer will ensure through competitive forces that the bulk of the subsidy is passed on to the seller. That's probably why Wall Street cheered today..
Op-Ed Columnist - Financial Policy Despair - NYTimes.com
Op-Ed Columnist - Financial Policy Despair - NYTimes.com
I could not agree more with Mr. Krugman on the sense of desperation over this plan.
I have cried a river over this, and over and over.
And I cry again...
However we arrive at the same conclusion from different analytic paths and our prescriptions differ. My analysis remains this
I could not agree more with Mr. Krugman on the sense of desperation over this plan.
I have cried a river over this, and over and over.
And I cry again...
However we arrive at the same conclusion from different analytic paths and our prescriptions differ. My analysis remains this
Sunday, March 22, 2009
Op-Ed Columnist - Are We Home Alone? - NYTimes.com
Op-Ed Columnist - Are We Home Alone? - NYTimes.com: "And you will ensure that we’ll never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets — and fund managers are growing terrified of any collaboration with government."
Huh!...
My only quarrel with the article is the apparent assumption that the plan the government appears to be poised to announce is the obviously best and only game in town...
Once more, Mr. Friedman, would you read this?
Huh!...
My only quarrel with the article is the apparent assumption that the plan the government appears to be poised to announce is the obviously best and only game in town...
Once more, Mr. Friedman, would you read this?
Saturday, March 21, 2009
Toxic Asset Plan Foresees Big Subsidies for Investors - NYTimes.com
Toxic Asset Plan Foresees Big Subsidies for Investors - NYTimes.com
Moronic disgrace.
Design complexity here is no substitute for discernment.
I cry a river over this.
See: http://knol.google.com/k/phil-kongtcheu/fair-value-pricing-government-market/
Moronic disgrace.
Design complexity here is no substitute for discernment.
I cry a river over this.
See: http://knol.google.com/k/phil-kongtcheu/fair-value-pricing-government-market/
Thursday, March 19, 2009
Fed Will Inject $1 Trillion More Into the Economy - NYTimes.com
Fed Will Inject $1 Trillion More Into the Economy - NYTimes.com
Not bad. But I think a but in a more structurally efficient way, the fed would expend less and achieve the goal of curbing long term rates if it made markets on overnight functional notionals BICs-FRAs along the term structure. Since this would recompose into long term bonds without immediately disbursing the cash needed to purchase long term bonds, it would use less capital.
In 2005 when the fed was desperately trying to raise long term rates to dampen speculation on mortgages, but considering it prohibitively expensive to get into the business of selling long term bonds, I volunteered a piece to the NYT and WSJ explaining how BICs might help do this efficiently. No one was interested.
Still, policy makers have not figured this one out...What else can I do?
Not bad. But I think a but in a more structurally efficient way, the fed would expend less and achieve the goal of curbing long term rates if it made markets on overnight functional notionals BICs-FRAs along the term structure. Since this would recompose into long term bonds without immediately disbursing the cash needed to purchase long term bonds, it would use less capital.
In 2005 when the fed was desperately trying to raise long term rates to dampen speculation on mortgages, but considering it prohibitively expensive to get into the business of selling long term bonds, I volunteered a piece to the NYT and WSJ explaining how BICs might help do this efficiently. No one was interested.
Still, policy makers have not figured this one out...What else can I do?
Thursday, March 12, 2009
Charlie Rose - A conversation with Timothy Geithner, U.S. Treasury Secretary
Charlie Rose - A conversation with Timothy Geithner, U.S. Treasury Secretary
In this interview he made a lot of sense. His enunciation of principles is coherent; however the actual tools to effect those principles, while not entirely unacceptable are not always the most effective I would think of.
"Ars sine scientia nihil est"
For example, when he is talking about doing the private public partnership to unclog tarp assets . They are going to lend money to private investors so that the can go and buy tarp assets. The contention I have repeatedly made is: why would this be better than setting up a market making operation on those assets traded at a refined level of granularity?
In this interview he made a lot of sense. His enunciation of principles is coherent; however the actual tools to effect those principles, while not entirely unacceptable are not always the most effective I would think of.
"Ars sine scientia nihil est"
For example, when he is talking about doing the private public partnership to unclog tarp assets . They are going to lend money to private investors so that the can go and buy tarp assets. The contention I have repeatedly made is: why would this be better than setting up a market making operation on those assets traded at a refined level of granularity?
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