World Bank launches distressed assets programme - Risk.net: "World Bank launches distressed assets programme"
This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.
It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.
Wednesday, October 7, 2009
Monday, October 5, 2009
Public-Private Investment Program Almost Ready to Begin - NYTimes.com
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
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
Saturday, September 19, 2009
Op-Ed Columnist - No, It’s Not About Race - NYTimes.com
Op-Ed Columnist - No, It’s Not About Race - NYTimes.com: "For example, for generations schoolchildren studied the long debate between Hamiltonians and Jeffersonians. Hamiltonians stood for urbanism, industrialism and federal power. Jeffersonians were suspicious of urban elites and financial concentration and believed in small-town virtues and limited government. Jefferson advocated “a wise and frugal government” that will keep people from hurting each other, but will otherwise leave them free and “shall not take from the mouth of labor the bread it has earned.”"
This Hamiltonian Vs. Jeffersonians divide which has recently been stated as Blue Vs. Red states is a very rational behavior even though it does not seem so a priori and can be explained via population density and the holistic theorem: The more concentrated a population, the more it makes sense for it to seek government intermediation. The more people there are, the more government intervention makes sense, on a linear cost bringing in quadratic benefits basis.
This Hamiltonian Vs. Jeffersonians divide which has recently been stated as Blue Vs. Red states is a very rational behavior even though it does not seem so a priori and can be explained via population density and the holistic theorem: The more concentrated a population, the more it makes sense for it to seek government intermediation. The more people there are, the more government intervention makes sense, on a linear cost bringing in quadratic benefits basis.
Monday, September 7, 2009
How Did Economists Get It So Wrong? - NYTimes.com
How Did Economists Get It So Wrong? - NYTimes.com
This piece is well written and offers a plausible explanation within the framework of mainstream accepted knowledge. But it's explanations merely reflect what has emerged as conventional wisdom and the intellectual strengths and weaknesses of its author, namely strength in economic history understanding and relative weakness in mathematical fluency.
As a result the piece trashes mathematical skill and look to economic history in Keynesian analysis to seek prescriptions for the current predicament.
What Mr. Krugman may not be able to grasp is not that there are good maths and there are bad maths. The maths used in economic theory and neoclassical economic theory since the end of WWII is transposed from Physics and seems a priori impressive. But we seek to address economic issues. "It ain't Physics" . It is only suitable and built for a world with no constraints on resources, continuity of time and space, unrestricted trade i.e. no frictions, perfect rationality of operators, etc.
There have been recent attempts to correct those assumptions, but all withing the edifice of the traditional mathematical architecture.
Indeed behavioral economics and finance are descriptive theories and provide a well deserved criticism of rational agents theories, but these have not been translated in efficient prescriptive formulations.
BICs are built from the ground up to provide a more resilient framework for more effective formulations that reflect actual human economic reality and behavior. They provide the math to efficiently accommodate evolving economic realities
My biggest concern is with prescriptions that are derived from Mr. Krugman's analysis. They are backward looking and fail to integrate the economic transformations that have taken place since the 1930s, notably the advent of the Internet, the rise of the service and network economies, the relative decline of manufacturing as a source of economic wealth, globalization, the environment...
-------------
PS: The following section made me scratch my head:"The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims."
Although the original vanilla call option was originally priced by Fischer Black using a CAPM based argument, derivatives pricing theory in all subsequent textbooks more the arbitrage arguments along Merton's Rational Pricing Theory. It is true that Merton makes a CAPM style argument to value derivatives in incomplete settings such as underlyings driven by jumps, but a robust and replicative pricing argument can still be made without reference to the CAPM and its outrageous assumptions, as I do with BICss.
OK, here let's just say the proposition on CAPM as the modern tool used to value derivatives is debatable. As far as I know, the CAPM is more commonly used in corporate finance for corporate valuation purposes where one uses the CAPM to obtain the required rate of return that is used to discount expected future earnings to deduce present value.
But what's really is a bit startling to me is the characterization of derivatives as "claims on claims"... Derivatives are contracts whose payout is is derived from(i.e. is a function of )the value of other observables(stocks, credit indices, temperature,...) at payout payment time(i.e. maturity).
This piece is well written and offers a plausible explanation within the framework of mainstream accepted knowledge. But it's explanations merely reflect what has emerged as conventional wisdom and the intellectual strengths and weaknesses of its author, namely strength in economic history understanding and relative weakness in mathematical fluency.
As a result the piece trashes mathematical skill and look to economic history in Keynesian analysis to seek prescriptions for the current predicament.
What Mr. Krugman may not be able to grasp is not that there are good maths and there are bad maths. The maths used in economic theory and neoclassical economic theory since the end of WWII is transposed from Physics and seems a priori impressive. But we seek to address economic issues. "It ain't Physics" . It is only suitable and built for a world with no constraints on resources, continuity of time and space, unrestricted trade i.e. no frictions, perfect rationality of operators, etc.
There have been recent attempts to correct those assumptions, but all withing the edifice of the traditional mathematical architecture.
Indeed behavioral economics and finance are descriptive theories and provide a well deserved criticism of rational agents theories, but these have not been translated in efficient prescriptive formulations.
BICs are built from the ground up to provide a more resilient framework for more effective formulations that reflect actual human economic reality and behavior. They provide the math to efficiently accommodate evolving economic realities
My biggest concern is with prescriptions that are derived from Mr. Krugman's analysis. They are backward looking and fail to integrate the economic transformations that have taken place since the 1930s, notably the advent of the Internet, the rise of the service and network economies, the relative decline of manufacturing as a source of economic wealth, globalization, the environment...
-------------
PS: The following section made me scratch my head:"The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims."
Although the original vanilla call option was originally priced by Fischer Black using a CAPM based argument, derivatives pricing theory in all subsequent textbooks more the arbitrage arguments along Merton's Rational Pricing Theory. It is true that Merton makes a CAPM style argument to value derivatives in incomplete settings such as underlyings driven by jumps, but a robust and replicative pricing argument can still be made without reference to the CAPM and its outrageous assumptions, as I do with BICss.
OK, here let's just say the proposition on CAPM as the modern tool used to value derivatives is debatable. As far as I know, the CAPM is more commonly used in corporate finance for corporate valuation purposes where one uses the CAPM to obtain the required rate of return that is used to discount expected future earnings to deduce present value.
But what's really is a bit startling to me is the characterization of derivatives as "claims on claims"... Derivatives are contracts whose payout is is derived from(i.e. is a function of )the value of other observables(stocks, credit indices, temperature,...) at payout payment time(i.e. maturity).
Tuesday, September 1, 2009
Op-Ed Contributor - The Case Against a Super-Regulator - NYTimes.com
Op-Ed Contributor - The Case Against a Super-Regulator - NYTimes.com
This case does not seem to have been convincingly made.
While not voicing an opinion for or against a single regulator - It all depends on what they would be empowered to do- it seems to me the argument presented by Ms. Bair here, namely attention neglect that would threaten smaller community banks could be effectively addressed in a multi-layered supervisory system (layers being for example state-regional-federal) as advocated in our holistic theorem implementation recommendation for a single counterparty of reference on a subsidiarity principle See:http://www.authorstream.com/Presentation/kongtcheu-184552-UnityofPurpose3-Business-Finance-ppt-powerpoint/
See also the corresponding knol.
This case does not seem to have been convincingly made.
While not voicing an opinion for or against a single regulator - It all depends on what they would be empowered to do- it seems to me the argument presented by Ms. Bair here, namely attention neglect that would threaten smaller community banks could be effectively addressed in a multi-layered supervisory system (layers being for example state-regional-federal) as advocated in our holistic theorem implementation recommendation for a single counterparty of reference on a subsidiarity principle See:http://www.authorstream.com/Presentation/kongtcheu-184552-UnityofPurpose3-Business-Finance-ppt-powerpoint/
See also the corresponding knol.
Sunday, August 30, 2009
The Greenback Effect -Till Debt Does its Part -" Going where the Joneses Go Arguments"
Op-Ed Contributor - The Greenback Effect - NYTimes.com
This piece by virtue of who its author is was bound to be interesting and of interest to many.
Likening the Greenback effect to the Greenhouse effect is indeed an expression of intense intellectual alertness and the case against runaway deficits just like the case against runaway toxic gas emissions is sensible enough.
The larger issue with the piece is that the wrong assumption that GDP equals assets on the government balance sheet. Absent a demonstration of that essential link, the entire case falls apart.
It also brings back to mind an equally short-sided line heard a lot in this crisis that it is a fall in savings and a high level of debt that have pushed the US on an unsustainable path. This is so WRONG. As Mr. Buffett rightly says, "I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt." The same goes with individuals. The issue for individuals as with corporations or governments is HOW TO VALUE ASSETS OR LIABILITIES. It is not a simple question and there are a lot of ways to seem reasonable and be very wrong about it. It is an issue that requires deep analytical skills and an ability to creatively understand handle issues that far outstrip the intellectual arsenal of the winners of earlier generations. Those earlier winners are precisely those at the apex of their intellectual influence, yet they simply do not measure up to the scope of the issues. For example Paul Krugman’s recent Op-ed piece "Till Debt Does Its Part" while correctly making the argument that debt or the deficit are not the issue some seem to make it to be, still rely on the same fallacious debt or deficit to GDP ratios and uses historical and international comparisons for calibration purposes. To me this is still a going where the Joneses go argument.
This issue does is not limited to policy makers and analysts, but it extends to the most respected mathematicians of finance.
Because we currently use inefficient and unstable methods for these valuations (Buffett here equates GDP with the government balance sheet),there is a lot of instability in those valuations which results in unwieldy swings that bring us so often close to the abyss. This is where the robustness in the BICs valuation approach will in time be seen as providing the best framework for stable and dependable valuations of all types of assets thereby substantially eliminating volatility in assets valuations.
If government assets were properly valued, it could in fact responsibly borrow without ever minding the deficit, the size of the GDP, as long as the assets created with the monies borrowed could be reliably shown to be worth even more.
Reference:
http://www.nytimes.com/2009/08/19/opinion/19buffett.html?scp=1&sq=The%20greenback%20effect&st=Search
http://www.nytimes.com/2009/08/28/opinion/28krugman.html?em
This piece by virtue of who its author is was bound to be interesting and of interest to many.
Likening the Greenback effect to the Greenhouse effect is indeed an expression of intense intellectual alertness and the case against runaway deficits just like the case against runaway toxic gas emissions is sensible enough.
The larger issue with the piece is that the wrong assumption that GDP equals assets on the government balance sheet. Absent a demonstration of that essential link, the entire case falls apart.
It also brings back to mind an equally short-sided line heard a lot in this crisis that it is a fall in savings and a high level of debt that have pushed the US on an unsustainable path. This is so WRONG. As Mr. Buffett rightly says, "I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt." The same goes with individuals. The issue for individuals as with corporations or governments is HOW TO VALUE ASSETS OR LIABILITIES. It is not a simple question and there are a lot of ways to seem reasonable and be very wrong about it. It is an issue that requires deep analytical skills and an ability to creatively understand handle issues that far outstrip the intellectual arsenal of the winners of earlier generations. Those earlier winners are precisely those at the apex of their intellectual influence, yet they simply do not measure up to the scope of the issues. For example Paul Krugman’s recent Op-ed piece "Till Debt Does Its Part" while correctly making the argument that debt or the deficit are not the issue some seem to make it to be, still rely on the same fallacious debt or deficit to GDP ratios and uses historical and international comparisons for calibration purposes. To me this is still a going where the Joneses go argument.
This issue does is not limited to policy makers and analysts, but it extends to the most respected mathematicians of finance.
Because we currently use inefficient and unstable methods for these valuations (Buffett here equates GDP with the government balance sheet),there is a lot of instability in those valuations which results in unwieldy swings that bring us so often close to the abyss. This is where the robustness in the BICs valuation approach will in time be seen as providing the best framework for stable and dependable valuations of all types of assets thereby substantially eliminating volatility in assets valuations.
If government assets were properly valued, it could in fact responsibly borrow without ever minding the deficit, the size of the GDP, as long as the assets created with the monies borrowed could be reliably shown to be worth even more.
Reference:
http://www.nytimes.com/2009/08/19/opinion/19buffett.html?scp=1&sq=The%20greenback%20effect&st=Search
http://www.nytimes.com/2009/08/28/opinion/28krugman.html?em
Friday, August 14, 2009
The Investment Professional - BICS, the PPIP, and Expectations-Based Risk Management
The Investment Professional - BICS, the PPIP, and Expectations-Based Risk Management: "Smoke and Mirrors
BICS, the PPIP, and the Fallacies of
Expectations-Based Risk Management"
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html
Check this out. I'll just update with the following comment:
"With signs of impending economic peril dissipating, the PPIP looks to become one of the greatest government programs that never were.Yet the structural tools used in the analysis here and the core criticisms they lead to makes it a Gedankenexperiment whose lessons are still very worth learning."
BICS, the PPIP, and the Fallacies of
Expectations-Based Risk Management"
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html
Check this out. I'll just update with the following comment:
"With signs of impending economic peril dissipating, the PPIP looks to become one of the greatest government programs that never were.Yet the structural tools used in the analysis here and the core criticisms they lead to makes it a Gedankenexperiment whose lessons are still very worth learning."
Sunday, July 26, 2009
Op-Ed Contributor - The Great Preventer - NYTimes.com
Op-Ed Contributor - The Great Preventer - NYTimes.com:
Interesting piece. I am not sure whether stating that a person was actively complicit in the creation of a disaster and then participated in the rescue from the abyss is the soundest argument to make the case for them to be REWARDED. The opposing piece by Anna Jacobson Schwartz seems more coherently argumented.
Precisely with respect to BICs, when Roubini recalls that "The Fed even committed to purchasing up to $1.7 trillion of Treasury bonds, mortgage-backed securities and agency debt to reduce market rates." it once more makes me thing how much most cost-efficiently the fed could have controlled long term rates with interest rate BICs that replicate the whole curve.
I argue that the Fed making markets on interest rate BICs should be a major aspect of needed reforms at the Fed. Indeed in the 2003-2006 period, the fed had a hard time curbing the speculative bubble in the real estate market because acting only on overnight lending rates, it could not control long term rates that determine mortgage rates.
Interesting piece. I am not sure whether stating that a person was actively complicit in the creation of a disaster and then participated in the rescue from the abyss is the soundest argument to make the case for them to be REWARDED. The opposing piece by Anna Jacobson Schwartz seems more coherently argumented.
Precisely with respect to BICs, when Roubini recalls that "The Fed even committed to purchasing up to $1.7 trillion of Treasury bonds, mortgage-backed securities and agency debt to reduce market rates." it once more makes me thing how much most cost-efficiently the fed could have controlled long term rates with interest rate BICs that replicate the whole curve.
I argue that the Fed making markets on interest rate BICs should be a major aspect of needed reforms at the Fed. Indeed in the 2003-2006 period, the fed had a hard time curbing the speculative bubble in the real estate market because acting only on overnight lending rates, it could not control long term rates that determine mortgage rates.
Thursday, July 16, 2009
Holistic Theorem - Wolfram Demonstrations Project
Holistic Theorem - Wolfram Demonstrations Project:
The Wolfram Demonstrations project today released my peer reviewed dynamic illustration of the "Holistic Theorem" which is the basis of my unity of purpose article which argues that it is in the self interest of financial institutions to welcome mandatory clearing of financial derivatives. Its key proposition is that:
"'The more people participate in a system, the more it makes sense for a central authority to mediate their relationships/communication; no matter what the cost for setting up this central authority, as the number of participants increases, this cost is dwarfed by the benefits of centralized mediation on a linear versus quadratic basis'."
The Wolfram Demonstrations project today released my peer reviewed dynamic illustration of the "Holistic Theorem" which is the basis of my unity of purpose article which argues that it is in the self interest of financial institutions to welcome mandatory clearing of financial derivatives. Its key proposition is that:
"'The more people participate in a system, the more it makes sense for a central authority to mediate their relationships/communication; no matter what the cost for setting up this central authority, as the number of participants increases, this cost is dwarfed by the benefits of centralized mediation on a linear versus quadratic basis'."
Saturday, July 11, 2009
Geithner: Business Hedging Isn't Target - WSJ.com
Geithner: Business Hedging Isn't Target - WSJ.com: "Mr. Geithner's testimony Friday didn't shed much new light on details that lawmakers and industry players are clamoring to hear. Specifically, it remains unclear how regulators will determine when a contract is considered standardized. Mr. Geithner conceded the administration isn't ready to carve out a definition, although he promised it would be broad and 'designed to be difficult to evade.'"
Comment:
The question of a definition is indeed KEY.
BICs provide the best framework for providing a robust working definition. See:http://tinyurl.com/cyxhpa
With BICs markets, BICs would be the "standardized derivatives" and everything else would be composed of such BICs. It helps solve hedging ability issues that are matters of concern in this article. In addition, it in effect ensures that economic efficiency forces, in the search for the cheapest production cost, will push derivatives trades where they are cheapest, i.e. in a centrally cleared exchange system.
Comment:
The question of a definition is indeed KEY.
BICs provide the best framework for providing a robust working definition. See:http://tinyurl.com/cyxhpa
With BICs markets, BICs would be the "standardized derivatives" and everything else would be composed of such BICs. It helps solve hedging ability issues that are matters of concern in this article. In addition, it in effect ensures that economic efficiency forces, in the search for the cheapest production cost, will push derivatives trades where they are cheapest, i.e. in a centrally cleared exchange system.
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