Depression

You know you are living during depression times, when you read about "banksters" jumping off the windows, aeh, in front of trains, and when you have sites like these:

dabagirls.com (Dating A Banker Anonymous):

Thanks to the recession, I now have a completely devoted BF, which is exactly what I wanted. So I should be happy, right? Wrong. I’m bored and can’t stop thinking about my perpetually unattainable Euro ex-boyfriend who is recession proof courtesy of an offshore trust account. To be honest, I’m only with my BF because I just don’t have the heart to change my facebook status from “in a relationship” to “I ain’t saying I’m a gold digger, but I ain’t messin’ with no broke banker.”

cluE NO

one or Honey Money...

Jesse's Café Américain: Is Money Supply a Relative Absolute?

If you have one thousand dollars in cash, in your pocket, is it completely equivalent to one thousand dollars worth of honey which you have at home in your pantry, in terms of its affect on inflation or deflation?

Forgiving the pun, the honey is decidedly less liquid than the cash.

Does it matter who is holding the money? What if the bulk of the money being added to to the economy is being given to gamblers in Las Vegas, rather than lets say farmers in Pennsylvania. Is there a difference in that money's effect on inflation or deflation?

The point is not to provide answer to these questions at this time, since this is basis for a new perspective in economics which is still in its early states.

Rather, it is to cast doubt on the certainty that what we call money is always and everywhere equivalent in force and power and influence as an economic actor no matter where and how it is held.

Some observations:

a) Money is an approximation of value at best, because we also don't know what the value of honey is either, and not all honey will be put to good use. Same as with money.

b) Money and honey, both have to flow, or they are not of much use.

c) Nevertheless money and honey function as value stores.

d) Did you know that wild honey comes from lice shit?!

Flickr impressions:

Money Supply

A good explanation of money supply (a.k.a. M0, M1, M2, and M3):

Jesse's Café Américain: Money Supply: A Primer

Money and Value

If you have a few spare hours (like five), here is a buddhist perspective on money by Ken McLeod:

MAV01: Money and Value (workshop)
MAV02: Money and Value (workshop)
MAV03: Money and Value (workshop)
MAV04: Money and Value (workshop)

Part 1 of 4
The problem: money drives the way we understand ourselves. Aim of financial model is to see experience through projection of money; aim of Buddhism is to experience what arises without projection; three bases of relationship: mutual benefit, shared aim, emotional connection; all forms of idealism involve avoidance of some form of suffering; when money is regarded as the problem, something else is being ignored; Questions: What are you asking for? What do you want? What does money symbolize to you?
Duration 00:43:53

Part 2 of 4
What generates the problem? Confusion about money points to confusion about what we value in our lives; when you see things in terms of money, you are inevitably in one of the six realms; guided meditations: survival, getting emotional needs met, and self-image; intention versus self-image; valuing what can be taken away places life in other people's hands.
Duration 01:27:31

Part 3 of 4
Possible directions towards a solution. The world of shared experience and the world we actually experience; money exists in the world of shared experience and of materialism; definition of materialism; comparison of the bases of life in world of materialism and world of well-being; comparison of spiritual ideal and being fully alive; Questions: What would you do with your life if you knew you would die in one year? If you were free from trying to get your emotional needs met? If you weren't concerned with being somebody?
Duration 01:21:17

Part 4 of 4
Theoretical and practical concepts of what might be done. Traditional Buddhist method of The Noble Eightfold Path; footnote on the word "right"; four bases of success – curiosity, persistence or enthusiasm, understanding of genesis and conditions, creativity in framing questions; seven steps of manifestation; Questions: What am I going to do next week? Next month? Next year?
Duration 01:14:17

Books recommend in these podcasts:

1. Buddhist Economics: A Middle Way for the market place by Ven. P. A. Payutto (follow the previous link and you get the online version)
2. Money and the Meaning of Life by Jacob Needleman
3. How to Cook Your Life: From the Zen Kitchen to Enlightenment by Kosho Uchiyama Roshi

Madoff: Skeptics Ask How

2001: Madoff tops charts; skeptics ask how
by Michael Ocrant

Via The Big Picture.

His Highness

Was this a comedy or some James Bond persiflage?

CNBC: Prince Alwaleed: 'Full Confidence' in Citi CEO Pandit

Money Talks

CHF 12 million returned by Peter Wuffli, which says: "I fucked up hugely". Respect for such a statement. It doesn't have to be the Japanese solution (harakiri:). But at times it is nice to hear that someone made a mistake. Not like Mr. Meritocracy Ospel saying good by with the words "UBS is well setup for the future", before going silence. On the other hand, if Mr. Grübel would actually have the dignity to also shut up, that would be also something.

Jim Rogers With Swiss Gold

Saw him in Zurich in the congress hall a day before he gave this video interview:
Jim Rogers on Bloomberg (10/24/08)
There he also proudly showed his gold coins purchased (for his daughters) that same day at the Zurich Bahnhofstrasse.

The video is only 10 minutes but well worth to watch. Other stuff he mentioned in Zurich was:
- He owns three Swiss bank accounts (his daughters own accounts as well, thought he pays his US taxes on them, again, so do his daughters:).
- He is long the CHF, as it has always been a currency of stability. Thought he is worried with the latest bank bailout of the Swiss National Bank. The other reason to be long is the unraveling of the CHF carry trades (similar to the JPY). Thought if the SNB keeps doing "mistakes", he will be out again. He is now worried for the first time in his life about the CHF.
- Commodities should bottom out and be rising again before the stock market. He had a nice chart depicting the 1930s comparing commodities and stock prices.
- Be long aggriculture (as mentioned in the video as no one likes being a farmer anymore).
- Taiwan is hot, as there is now "peace" for the first time (in his book) with China, and combining the Chinese labour market and production capabilities with the Taiwanese capital strength and technological knowhow will be a magical setup.
- Chinese stock market is down 70% and he started buying more (water, food, electricity). He didn't sell his holdings before but was long already for a couple of years.
- He owns a little ABB for years already.
- He is not good at timing, he needs advise there himself:).
- If you are a good stock picker, do it. Otherwise it is easier and saver to just own commodities/indices directly.
- Moved to Singapore instead of China, because of the terrible air in China. If Hong Kong cleans up its air, he would consider moving. Thought the problem with Singapore is, you get to hear both the worst English and Chinese. But again, he made sure to have the best teachers for his daughters.


Gold foil at the new museum Rietberg concrete entrance hall in Zurich (2007).

Buffett Bullish

NY Times article by Warren Buffett: Buy American. I Am.

Violent Volatility

Credit Suisse


Click on image for a larger version...

Edipresse


Illiquid instrument, eyh?!

1st CDS Tsunami Wave

First have a look at this (source here):

NOTIONAL AMOUNT OF DERIVATIVE CONTRACTS
TOP 25 COMMERCIAL BANKS AND TRUST COMPANIES IN DERIVATIVESJUNE 30, 2008, $ MILLIONS

Now the first numbers are balance sheet assets. Quite big numbers. The second row however have numbers that, to be honest, exceed my imagination. Those numbers consist of all kind of stuff, not only CDSs. Yet, the total market of CDSs might be in the USD 50 to 60 trillion range at this moment.

Now tomorrow on Friday October 10th we will have the auction to settle the Lehman CDSs.

The Big Picture: $400 Billion Lehman CDS Unwind?

Early October, Citi (C) credit analyst Michael Hampden-Turner estimated there is $400bn of Lehman credit derivatives that will be settled on Friday

Hence, some recent fear can now be attributed in part to jumbo losses caused by Lehman's derivative unwind . . . with JPMorgan (JPM) being the biggest potential collateral damage . JPM has the biggest derivative exposure on the Street (I have no opinion on how this impacts them or on their derivative exposure).
...
While Fannie and Freddie CDS settled at between 91.5 and 99.9 cents on the dollar., expectations are for Lehman to settle at 10 cent on the dollar -- causing a few $100 billion in losses.

From The Naked Capitalism blog's comments section

October 9, 2008 10:17 AM
Singapore Don said...

LEH CDS auction is tomorrow, October 10. It goes throguh a two stage process, as explained here

http://www.creditfixings.com/information/affiliations/fixings/auctions/current.html

The Fanny/Frerddy settlment went quite smoothly, and the agreed bond values came somewhere betweeen 91 and 99. According to my calculations (no expert), net amount that had to be paid out i.e. loss to protection writers was $1.2 billion. Divide that by 13 active participants, per participant the Fannie/Freddy CDS loss was average under $ 100 million. The Lehman auction clearing price will come out some where between 15 to 20, hopefully higher between 20 and 30. So the loss will be 85% to 70& of NET notional. Although the gross notionals in these CDS contracts are huge, net is usually smaller ( no one knows for sure how much smaller for the market as a whole although each house knows its own position. If Mack knows he has a big exposure on LEH CDS, would he be putting out "we are ok" call to all his boys yesterday?). Freddie/ Fannie Net settlement was $1.2 billion, and the average price was say 96. so the net exposure was approx $30billion. Fannie and Fredddy were the biggest insured names in the CDDS market. So for the Lehnam name, the NET exposure may be much smaller, but the loss per contract would be higher. If we say the Lehman Net Exposure is 20% to 25% of Freddie/Fannie net exposure of $30 billion, it would be around $6 billion to $7.5 billion, and with recovery at say between $50 and $60 billion total systemwide loss. Spread over the 13 major deealers, average is $4 to $ 5 billion, but the spread may be wide I dont know the bank equity analysts and the market has already factored such numbers in, but if the expectation is for lower number, than this may surprise on the upside. If the not, market may take a sigh of relief that the LEH CDS damnage is not so bad,

The only risk is that in the case of Lehman, there is much less netting i.e. the protection writers have huge one sides positions, and my estimates start blowing out.

Not an expert, just trying to decipher the numbers with some commonsense reasoning.

And from The Big Picture blog's comments section:

Posted by: The Financial Philosopher | Oct 9, 2008 1:26:31 PM

Looking at the table of derivatives exposure that Boom2Bust offered up a ways back in this thread, it strikes me as passin' strange that the CDS exposure for the top 3 banks (JPM, BoA, Citi) is so outsized in comparison to their other derivatives exposure.

Almost as if they knew that a big chunk of the CDS they had purchased were vaporous, and had over-committed to compensate for it -- if so, imagine their surprise when so much (all?) of the swaps turned out to be toxic! -- it would have been interesting to also see the CDO exposure for each of these fellas, as I really doubt that they had purchased/sold over a hundred trillion dollars worth of CDOs between the three of them.

It would be nice to see a competent panel of inquisitors (time to bring back the Spanish Inquisition?) grill the managements about this, and if it turned out that yes, they did over-commit because they were suspicious of the quality, then maybe we can find a better use for Gitmo than whatever we are currently using it for.

Or perhaps I am clueless here (there seems to be a lot of that going around recently), and there is a perfectly reasonable explanation for such outsized allocations of CDS that would fall within the envelope of legitimate business practices. If so, would some tolerant and knowledgeable soul please 'splain it to me?

Yes, can someone please explain to me wht economical sense there is in buying and selling derivatives over USD 90 trillion e.g. in the case of JP Morgan? If people said, yes, have known it all along, e.g. the UBS balance sheet was growing too big... then what please has been going on here?

Outlaw CDSs. Now!

From The Big Picture blog comments section:

Posted by: Alan Wilensky | Oct 9, 2008 12:06:14 PM

Declare all CDS instruments void and non-negotiable. The Fed and SEC can do this with a little know financial administrative called, "Tough Titty."

The Tough Titty invocation was jsut recently used to spew out the 700 (nee 880) billion dollar bailout, where the Treasury and Fed basically said, "Tough Titty", to the taxpayers.

So, for the CDS unwind, I advocate that the Tough Titty rule be invoked.

I wholeheartedly agree with this proposal! Take the funny money out of the system with a snap and let's keep going on with our real business. Not possible? Well, everything is possible.

CDS Systemic Risk

CDS Systemic risk: a primer about chain settlement risk.

An easy explanation of some theoretical problems with CDSs (and I am not sure this is the real and biggest problem with CDSs). But when you have CDS coverage of USD 60 trillion floating around, this also might be a real practical problem all too soon.

A grossly simplified example will explain it. Party A wishes to place a bet on Frannie default risk by purchasing CDS protection on Frannie. Party A buys protection from B. B is now exposed to the risk of a Frannie default and decides to hedge this risk by buying Frannie CDS protection from party C. C holds the position with net exposure for awhile, gets nervous and then offsets by purchasing protection from Party D, who then offsets the exposure with Party E.

For the sake of simplicity we will assume the default event of Frannie requires $10m in cash or securities to be delivered within 5 business days of the acknowledged default event. Now all of the parties involved have done their risk assessments of their downstream counterparty using various estimates of the counterparties credit quality and liquidity. They have each come to the conclusion, that their next counterparty has a .001% chance of failure at any point in time. They could thus assess the counterparty risk exposure in crude nominal terms as being $10mx 0.01% = $1,000. This feels safe.

Looking individually each party assumes they have $1,000 in risk. In reality A faces $4,000 in probable risk. The chain is only as strong as it weakest link. The end settlement party A has $4,000 exposure (1-(1-.0001)^4)*$1,000. Party B has a $3,000 exposure etc. The longer the chain the greater the systemic risk for the initiator and the potential for a failure to deliver on time etc.