Posts filed under “Derivatives”

Greenspan’s Legacy

I am traveling today, but filling in today with a special guest post is Jack McHugh:

Stocks took some positive news on the credit front and rallied Thursday, though efforts to run away to the upside were thwarted in the afternoon (see below).

The Bank of England, while not cutting rates or providing the type of "emergency liquidity" on offer at the Fed or ECB, nonetheless did ease some restrictions on its member banks this morning. LIBOR fell a bit, swap spreads came in, and financial stocks everywhere jumped.

Boosting the financials even further was word from Countrywide that it had secured even more funding.  The 14% rise in CFC’s stock price set the tone for what started out as a moonshot to the upside for most equities.

But enough of an undertow developed in technology stocks that some profit-taking set it before the bell.  The major averages finished with gains ranging from 0.3% (Russell 2000) to 1% (Dow). Treasury prices broadly retreated, which was unsurprising given the action in stocks and given that credit spreads narrowed. The dollar enjoyed a nice rebound, as it advanced against every major currency except the Canadian dollar. Commodities were mixed to down, and most major sectors saw some components rally while others declined (e.g. gasoline was up nicely, natural gas was down hard). The CRB index shed 0.25% by day’s end.

Alan Greenspan seemed larger than life during his tenure; some (like Congress) even worshiped him. But the impending release of his book (The Age of Turbulence) is causing him (or his publisher) to cast his long shadow just as Chairman Bernanke girds for his most important FOMC meeting yet. An interview with the Maestro will be aired this weekend on 60 Minutes, but excerpts found their way to media outlets this morning (see below). While giving Chairman Bernanke some moral support, Mr. Greenspan acknowledged that he misunderstood the housing bubble, the lax lending practices that supported it, and its potential negative effects on the rest of the U.S. economy.

Speaking of the poor mortgage underwriting practices that he lifted not one finger to fix, Greenspan said the following:

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” Greenspan said in the 60 Minutes interview. "I really didn’t get it until very late in 2005 and 2006,” as he was about to leave office…"It was nothing to look into particularly because we knew there was a number of such practices going on, but it’s very difficult for banking regulators to deal with that,” Greenspan said in the interview, CBS said. 
-Bloomberg, Greenspan Says He Failed to Foresee Subprime Rout

I’m sorry, Mr. Greenspan, but bank lending practices are EXACTLY what the Fed can and should regulate. Under Mr. Bernanke, for example, mortgage lending regulations have recently been tightened. It’s probably not entirely fair for me to castigate the former Chairman until I view the entire interview, but these snippets seem like revisionist history at best and the height of disingenuity at worst.

That he is trying to hog the headlines just as his successor is trying to deal with a mess of his creation will certainly not burnish the Maestro’s legacy. Paul Volcker used to just say "no comment" when asked about monetary policy after he left office. I wish Mr. Greenspan would have the class to follow his lead. His legacy was tarnished in my eyes long ago, but perhaps recent events will cause others to see that he was anything but omniscient.

It’s high time investors realized that central bankers are not gods; they are fallible, just like you and me.


Good stuff, Jack.

Note: Greenspan’s book — The Age of Turbulence — gets released Monday . . .   


Global Stocks, Dollar Rise, Bond Risk Falls on Improved Credit Outlook
Michael Patterson
Bloomberg, Sept. 13 2007

Greenspan Says He Failed to Foresee Subprime Rout
Craig Torres 
Bloomberg, Sept. 13 2007

Bernanke Spurns Greenspan’s Quick Fix, Seeking Data
Craig Torres 
Bloomberg, Sept. 13 2007

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Martin Feldstein on the Housing/Credit/Economic Mess

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A Thought Experiment

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Recursion, Reflexivity, Feedback Loops & the Fed

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Five Reasons Why the Fed Will Cut Rates

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A Demon of Our Own Design

I previously mentioned A Demon of Our Own Design in a linkfest a few weeks ago. I enjoyed the book a great deal, and just about finished it over the long weekend.

The opening paragraph just reached out and grabbed me: 

Bookstaberdemon_jacket"While it is not strictly true that I caused the two great financial
crises of the late twentieth century—the 1987 stock market crash and
the Long-Term Capital Management (LTCM) hedge fund debacle 11 years
later—let’s just say I was in the vicinity. If Wall Street is the
economy’s powerhouse, I was definitely one of the guys fiddling with
the controls. My actions seemed insignificant at the time, and
certainly the consequences were unintended. You don’t deliberately
obliterate hundreds of billions of dollars of investor money. And that
is at the heart of this book—it is going to happen again. The financial
markets that we have constructed are now so complex, and the speed of
transactions so fast, that apparently isolated actions and even minor
events can have catastrophic consequences."

Terrific stuff.

Indeed, I enjoyed the rest of the book. Bookstaber was on the scene in the early days of many of derivatives now contributing to market turmoil. He rather deftly makes complex issues readily understandable, regardless of how much advanced mathematics you may have under your belt.

And, he names names. LOTS of names. All the usual suspects come under scrutiny, as well as a lot of folks who probably assumed they were not int he public eye. There will be a lot of people not very happy with his blunt, insider descriptions of the analytical errors made by major players — many of whom are still around today and in positions of authority and power. 

He also accepts a lot of responsibility for many costly errors he himself made.   

Overall, a fun, very informative read.

I was intrigued enough by the book that I contacted Bookstaber (the author) and Wiley (the publisher), and asked for their permission to reproduce the first chapter. They graciously sent me a pdf and text version, which you will find after the jump: All of chapter one, in both text form and PDF. I also included some mainstream media reviews after the chapter. 

I have pretty good relationships with many of the publishing houses — they all want to get a book or two out of me. Anyway, if it turns out you guys like this idea, perhaps we can offer up a book or two that I am reading every month in this same format. Maybe we can have an online reading group club — it could be a good place to have a full discussion. Share your thoughts.

Enjoy chapter one.

Disclosure:  No, I don’t accept money for this — it was my idea, and I approached the publisher and author about this — not vice versa. Please don’t start bombarding me with offers to promote books I am not already reading. They will be unceremoniously deleted without response.

As noted in our disclosure section, we don’t do payola here (if you click thru and buy it on Amazon, I do see some scratch).


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