Lehman Merrill Lynch AIG Fannie Freddie WaMu Madoff Citibank saga

[Ka Wai]

I respectfully disagree.

Time to hire traders who understand markets and are accountable for their own risk.

It's a daunting task to ask your star trader to account for his own risk? He probably will fire you before you even finish your sentence. At the end, if the trader is making big money for you, your greed will take over your fear sooner or later.

 

[charlesdwright]

That sounds good, but how do you make traders running books in the millions "responsible" for the risks they take? Seize their property when they take a loss?

Edit to Add:
Not that I think risk management as currently conceived is necessarily the solution either. You can only hear about "ten-sigma events" so many times before you realize that there are some serious and sophisticated delusions out there in the world.

A short answer would be that you delegate authority to put capital at risk only to people who are fit for it.

When you have tons and tons of cheap money to play with, you can't grow fast enough to put it to work. You might tend to be a bit lax in your staffing criteria, your deal selection criteria, etc, as a result. Consider the entire concept of "liar loans." What made them possible to begin with? They were unheard of a decade ago.

You can have the most invasive, intrusive, omniscient and omnipotent "risk management" possible. But if you're sitting on a book of bad ideas, the horse is already out of the barn. You're not managing risk, you're managing failure.

Yes, of course, as the book becomes more complex, it requires management. But -- by way of reductio ad absurdum -- management can't turn a team of slackers and paycheck players into World Series Champs. The team has to be competent, to a man.

So my answer is, if you don't have competent staff, don't do the trade. Trade your competence. Don't incentivize myopia.

The bulk of this can be traced to easy money -- that is, mispriced money. And bad judgment, of course, which is never in short supply. Especially when there's easy money around.

 

[bob]

All right, but it's difficult to disagree with a tautology. If the answer to how we trade well is not to trade badly, then the situation truly is dire.

You speak of it in pejorative terms, but to my mind what "risk management" is missing, precisely, is the ability to manage failure. It's a very old kind of hubris to believe that any expedient--whether it's more power in the hands of risk managers, or more in the hands of traders--can categorically prevent a Bear, a Lehman, and so on. The question to address, I think, is not how to prevent such a circumstance from arising, but how to act when it inevitably does.

 

[charlesdwright]

All right, but it's difficult to disagree with a tautology. If the answer to how we trade well is not to trade badly, then the situation truly is dire.

You speak of it in pejorative terms, but to my mind what "risk management" is missing, precisely, is the ability to manage failure. It's a very old kind of hubris to believe that any expedient--whether it's more power in the hands of risk managers, or more in the hands of traders--can categorically prevent a Bear, a Lehman, and so on. The question to address, I think, is not how to prevent such a circumstance from arising, but how to act when it inevitably does.

Is it really a tautology to say that sound business practices involve making sound decisions? That a solid building must be comprised of solid materials?

You start a pitcher that has ability. You run the risk that he'll suffer a rotator cuff injury. In the even it happens, you manage it.

You start your mailman as a pitcher. You finish the first inning behind, 10 - 0. Casey Stengel couldn't make him into Cy Young.

Risk management has and always will be the foremost concern on any competent trader's mind. Capital preservation is rule one in any competent traders mind. He always tells himself, "live to trade another day."

Institutionalized, pooled risk management is going to yield institutional - quality results: lots of mediocrity with the occasional spectacular blowout. Disregard for the money under management leads to foolish risk taking. An implicit government bailout does, too. The pejorative terminology is aimed squarely at the idea that big, complex models can replace competent decision makers. It is certainly not aimed at the concept of risk management.

Once again, you trade your competence, as an individual and as a firm.

On the uphill side of a credit bubble, trading is very easy, mispricing is routine, and risk management is on the mundane side of things. Default correlations seem manageable. When money tightens up, all of a sudden, what once wasn't correlated is, just like the model you showed us in class -- the one that looked like the Golden Gate bridge.

...gotta leave it here for now.

 

[kean]

So who will have the hope then ? There are always time that things go up and down. I don't think the re-shuffle of Wall Street will wipe out Quant as a profession, nor Structured Finance. Just concentrate at learning new stuff if you are still at school, or work harder/smarter if you are working

"Hopeless" is too much a strong word. There is always hope.

it's helpless!

 

[Andy Nguyen]

Lehman CDS has been traded up front as of 9/15. It went as high as 60% on the notional. There has been no quote for it today so I guess it's end game.

 

[John]

Barclays reportedly reached deal to buy Lehman's securities unit for $US 2 billion, 10,000 jobs saved (this is really good news)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7CZXEXhlocI&refer=home

 

[allahmode]

Yep, just heard the good news from Bloomberg. Should be good for the long-run, but lets see how the markets react in the next couple of days/weeks.

- Al


"That's all right. These things gotta happen every five years or so, ten years. Helps to get rid of the bad blood. Been ten years since the last one."
- Pete Clemenza (Godfather)

 

[bob]

Barclays reportedly reached deal to buy Lehman's securities unit for $US 2 billion, 10,000 jobs saved (this is really good news)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7CZXEXhlocI&refer=home

Looks like a bargain price, given that they were able to pick and choose the asset classes they bought. The jobs thing will put huge pressure on the bankruptcy judge to let it go through--wonder how the creditors feel about it?

 

[Uncle Max]

The Scene at Lehman Brothers London on Friday:

 

[John Jurcevic]

More Fallout from the Lehman Saga...

The tendrils of Lehman's corpse are taking down one of the largest money-market funds, Reserve Primary Money. From Bloomberg:

The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.

Money-market funds are supposed to be safe so how did Reserve Primary Money get themselves into this mess?

Of course it's the financial engineers who are taking the hit for Lehman's demise as per the Asia Times:

An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage.

The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability.

Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It only could be allowed to collapse.

 

[doug reich]

John: that article on Reserve Primary Money was chock full of goodies.

The only other money- market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.

RPM has joined an elite group, you can see.

If you read down a little, that this group of MM funds that have broken the buck is a ruse:

Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner.

``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.

Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' Lehman holdings totaled $494 million.

The parent usually takes the hit so that the MM can avoid it; Reserve just didn't have anyone else to take the fall for it.

 

[doug reich]

Some frighteningly accurate sarcasm: The Big Picture | The Terrible Lessons of Bear Stearns -- we just have to hang around until the next crop of "too big to fail" get up to bat: the JP Morgans and BAC's of the new world order...

 

[John Jurcevic]

That was some great snark from The Big Picture. I'm glad that as a taxpayer I now own 79.9% of too-big-to-fail AIG and look forward to lining my pockets with the abundant flow of future profits...

 

[alain]

This is nationalization at its finest... Castro and Chavez would be proud!!!

 

[Eugene Krel]

Viva la Revolucion!

 

[Eddie]

I think we should move the discussion focus to MS ang GS now... ...

 

[Uncle Max]

OK, I will create new thread on MS

 

[charlesdwright]

This is nationalization at its finest... Castro and Chavez would be proud!!!

Alain, I'm very surprised by your comment. I realize you were using hyperbole, however, as it's a common train of thoughts under the circumstances, it deserves some comment.

"Lender of last resort" is what the Fed is charged with being. I didn't see people lining up outside AIG with Brinks trucks.

Furthermore, the deal has a logical structure that is designed to hold the balance sheet of AIG over until the market comes back to its senses and it can be marked fairly; there is a penalty interest that incentivizes them to liquidate and pay off the loan as soon as it's feasible.

This is the way it works. The alternatives -- the ones you suggest we are emulating -- don't begin to compare with ours, and there is no valid comparison between the Fed discharging its duty in a crisis and a command economy that enslaves its population.

I'll take ours.

 

[woody]

My company's IT Director, who lives near Lehman, stood outside the building on Monday with a sign saying that he's looking to hire a systems administrator. He was quoted in a couple of papers and has his pic in one.