Great short interview with the so-called "father of modern finance".
Quote: Active management is a negative sum game.
Tuesday, May 15, 2012
Tuesday, May 8, 2012
Monday, May 7, 2012
An interesting take on floating rate notes
There's been some discussion of whether the Treasury should issue floating rate notes. Some people argue that doing so would expose the government to interest rate risk, but as this blog posting points out, this risk is already present in the current way that the government issues short term debt.
An interesting piece and worth the read.
An interesting piece and worth the read.
Friday, May 4, 2012
A great explainer of Shiller's 10 year PE ratio
Robert Shiller (Yale Economist) computes a 10 year PE ratio which aims to smooth out short term earnings fluctuations to give a longer run view of market valuation. The following is a really great explanation of this metric and some its uses.
My only quibble with the article is the bit about the level of the PE and the return on Treasuries. This is basically the argument of the so-called Fed Model, which is on pretty shaky ground from a theoretical perspective. I won't rehash the issue now as I've talked about this before here and here.
My only quibble with the article is the bit about the level of the PE and the return on Treasuries. This is basically the argument of the so-called Fed Model, which is on pretty shaky ground from a theoretical perspective. I won't rehash the issue now as I've talked about this before here and here.
Thursday, May 3, 2012
How is financial reform coming along...?
How timely - just as I posted on the financial reform of Wall Street (or lack thereof), Felix Salmon has a post on the same topic - much more informative than mine of course. He actually cites people in the know!
Money Power and Wall Street - a few thoughts
I caught the final episode of Money Power and Wall Street on Frontline last night (thanks to my DVR). If you missed it you can watch it on the PBS website.
Overall, I thought it was pretty good. The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits. In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.
I was actually pretty surprised at how naive some of the buyers of these swaps were. Basically they were swapping a higher fixed rate for a lower variable rate. This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof. In my opinion, municipalities have no business swapping fixed payments for variable rates. In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today". That's not the job of local government. Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.
The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time. In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.
Going forward, it was clear that nothing has really changed. The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.
Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking. I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail. Finally, I think investment banks should go back to being organized as partnerships and not as corporations. Under the partnership model, the partners were always on the hook for the risks taken by the bank.
I have zero confidence in any of these things happening however.
Overall, I thought it was pretty good. The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits. In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.
I was actually pretty surprised at how naive some of the buyers of these swaps were. Basically they were swapping a higher fixed rate for a lower variable rate. This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof. In my opinion, municipalities have no business swapping fixed payments for variable rates. In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today". That's not the job of local government. Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.
The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time. In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.
Going forward, it was clear that nothing has really changed. The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.
Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking. I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail. Finally, I think investment banks should go back to being organized as partnerships and not as corporations. Under the partnership model, the partners were always on the hook for the risks taken by the bank.
I have zero confidence in any of these things happening however.
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