Posts filed under “Derivatives”
Nasty article in Der Spiegel, Out of Control: The Destructive Power of the Financial Markets, which helps explain what’s behind the financial transactions tax that was recently introduced by Angela Merkel and Nicolas Sarkozy. The article opens,
The enemy looks friendly and unpretentious. With his scuffed shoes and thinning gray hair, John Taylor resembles an elderly sociology professor. Books line the dark, floor-to-ceiling wooden shelves in his office in Manhattan, alongside a bust of Theodore Roosevelt and an antique telescope.
Taylor is the chairman and CEO of FX Concepts, a hedge fund that specializes in currency speculation. It’s the largest hedge fund of its kind worldwide, which is why Taylor is held partly responsible for the crash of the euro. Critics accuse Taylor and others like him of having exacerbated the government crisis in Greece and accelerated the collapse in Ireland.
The vitriol for hedge fund types is ubiquitous, but there is also a some truth in the article, especially on regulatory issues. Swedish Finance Minister Anders Borg refers to people like Taylor as “like a pack of wolves.” New York Governor Andrew Cuomo even gets into the mix as once likening short-sellers to “looters after a hurricane.”
Here are some more money quotes from the piece, which is well worth your time:
- The truth is that the financial markets are controlling the politicians.
– The markets take advantage of every weakness and every rumor to speculate against one country after the next.
- Stock markets are currently in turmoil. Even the most experienced equity traders cannot remember a time when prices fluctuated as widely from day to day — and often even within a single day — as they have in recent weeks.
- But without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today — at the edge of an abyss.
- Many things that happen on Wall Street and in London’s financial district are “socially useless,” says Lord Adair Turner, chairman of Britain’s Financial Services Authority (FSA).
- Flassbeck believes that the crises in the globalized economy have “a common root, namely the inability of economists to correctly interpret the world.”
-Of all people, it was an academic specializing in literary studies who managed to most accurately analyze the insanity of the financial markets and the impotence of economists.
- When Deutsche Börse decided to move from Frankfurt to the nearby town of Eschborn, the town saw a rapid increase in the demand for air-conditioned basement space, where so-called high-frequency traders, as well as banks, set up their state-of-the-art supercomputers.
- The traders at Deutsche Bank are apparently more clued into who holds Greece’s government bonds than the Greeks themselves.
- Speculation has always existed in economic history, but never to such an extent as today.
- German Chancellor Angela Merkel knows that there is more at stake than the stability of the economy and overcoming a temporary weakness. “This type of crisis cannot be allowed to repeat itself in the foreseeable future,” Merkel said, “otherwise it will be extremely difficult to guarantee political stability, and not only in Germany.”
- Following the near-collapse of the markets, then-German President Horst Köhler characterized the financial markets as a “monster.”
- Jochen Sanio, head of Germany’s banking regulatory agency, believes it is highly likely that the next crisis will emanate from this largely unregulated realm of hedge funds and other financial players.
- When asked whether it is possible to make future crises unlikely, Hilmar Kopper, the former CEO of Deutsche Bank and current chairman of the supervisory board of HSH Nordbank, replies with a simple “no.” According to Kopper, more huge financial bubbles could happen in the future.
(click here if charts are not observable)
The Destructive Power of the Financial Markets
DIETMAR HAWRANEK, ARMIN MAHLER, CHRISTOPH PAULY, MICHAELA SCHIESSL AND THOMAS SCHULZ
Der Spiegel, 8/22/11
This is pretty damned FUGLY: Click for larger graphic > click for larger chart Mark Gongloff explains the pain: “In the credit-default swap market, spreads are wider across the board, meaning people are paying up for protection. The Markit investment-grade corporate debt index is 3 basis points wider. The index of European sovereign debt is…Read More
Wolfgang Münchau on the complex debt product — a variant of a collateralised debt obligation — the European politicians have turned to solve the debt crisis:
if you own a Greek bond that matures by June 2014, you keep 30 per cent of the redemption as cash, and roll over 70 per cent into a 30-year Greek government bond. The Greeks will have to pay an annual coupon, or interest rate, of between 5.5 per cent and 8 per cent. The precise rate will depend on future economic growth.
Of the money received, Greece will lend on 30 per cent to a special purpose vehicle, another well-known construction from the subprime mortgage crisis. The SPV invests into AAA-rated government or agency bonds, and issues a 30-year zero coupon bond. The purpose of this is to guarantee the principal of the 30-year Greek government bond that you just bought.
With this construction, the downside to your losses is limited. Depending on how some of the parameters of this agreement evolve, you will probably make a small loss, relative to the par value of your holding. If you are lucky, you might come out positive. You will probably not be lucky. But you will still be better off than if you sold today, or if Greece were to default. More important, the accounting rules allow you to pretend that you are not making any losses at all.
The French roll over proposal to address Greece’s debt sustainability problems is a welcome acknowledgement of the need to restructure but, says Jens Larsen, chief European economist at RBC Capital Markets, it will not be enough to solve the issue or reduce the possibility of contagion. He tells Richard Milne, capital markets editor, what he believes the true end game will involve.
click for video
The Greek rollover pact is like a toxic CDO
FT, July 3, 2011 3:49 pm
Here is a blast from the past: Precisely 4 years ago on June 30th, we took a closer look at CDOs. It was in response to a remarkably sanguine question: CDOs: what’s the big deal? We thought they were a big deal, and posed 10 Questions About CDOs. Here are my 10 questions: 1. What…Read More
Saul Doctor, JP Morgan research analyst, walks Tom Keene and Ken Prewitt through the complexities of credit default swaps on Greek government debt and why some short Greek paper may actually be a good buy. Q: Tell us the distinction between actual government bonds and credit default swaps. What is the the relative size of…Read More
Did Goldman mislead Congress about its ‘Big Short?’ The answer, according to PPWIJ* Jesse Eisinger, is an emphatic yes. Eisinger cuts right to the heart of the matter regarding Goldman Sachs possible perjury regarding their “big short.” It was not the actual size of the short, but it was a) How GS got short; and…Read More
Jeffrey Gundlach: Here’s The Currency That’s Better Than Gold In An Extreme Crisis
Business Insider May 27, 2011
Isaac Gradman was involved in some of the earliest litigation arising from the subprime mortgage crisis. He received his B.A. in Political and Social Thought with Highest Distinction from UVA, where he was a Jefferson Scholar, an Echols Scholar and a member of the Raven Honor Society. Isaac received his J.D. cum laude from N.Y.U….Read More