pearls of wisdom

from the oracle of omaha

and from bbc on marketing...

part1,
part2,
part3,
part4

Some interesting vids.

Richard Dawkins on Evolution


Finally, the subprime crisis explained

on american neo-conservatives .. A 3 part documentary from BBC link1, link2 , link3

Dangerous Knowledge

The sketch is okay... but the videos at the bottom are really interesting...

check em out here..

Business week article on H1B fraud

Just what it says... read on here

Nicholas Nassim Taleb

If you are wondering how Nassim Taleb has been performing this year, not bad at all...

Of course there has been no shortage of Fat Tails this year.

Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The Standard & Poor's 500 Index lost 39 percent in the same period.

This guy has earned so much money in 87 and so much fame after wards, that I believe he cares about neither.

``I am very sad to be vindicated,'' Taleb said today in an interview in London. ``I don't care about the money. We're proud we protected our investors.''

And something that seems to have escaped most of the risk managers in the world.

``We refused to touch credit default swaps,'' Taleb said. ``It would be like buying insurance on the Titanic from someone on the Titanic.''

And he ends by taking a pot shot at my current profession... Too bad

``We would like society to lock up quantitative risk managers before they cause more damage,'' Taleb said.

Read the whole thing

Charles Keating

I am sure by now you would have heard about this guy, in case not, you can read more over here and here .

I dont understand how the democrats fail to make a big deal of this for the elections..

I am legend

If you have watched the movie 'I am legend' and liked it, but not quite.. this would be interesting...

this is the original ending for the movie.. apparently, the studios wanted to end with a bang and hence the ending was changed... i think it is pretty interesting the way it originally was... click here

Exchange Rate

Did any one checkout the rupee exchange rate lately?

It is at 48.. havent seen it this high in the past 7 years. I have a feeling this is not going to last long though...

rbi website

Dick Fuld gets something he deserves

Via Clusterstock

Dick Fuld, the disgraced Lehman Brothers chief executive, is a well known fitness fanatic. On the Sunday following the declaration of bankruptcy by Lehman Brothers, that proved to be his undoing when he was attacked in the gym by an angry employee.

The story was first mentioned on DealBreaker, which printed a reader's email about the incident but described it as "highly unlikely." But it looks like the highly unlikely occurred.

Vicky Ward, a Vanity Fair and CNBC contributor, reported on CNBC that "two very senior sources - one incredibly senior source" had confirmed it to her. "He went to the gym after ... Lehman was announced as going under," she said. "He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold."

Ward was not exactly disapproving of the attack on Fuld. "And frankly after having watched [Mr Fuld's testimony to the committee], I'd have done the same too," she said. "I thought he was shameless ... I thought it was appalling. He blamed everyone ... He blamed everybody but himself."

You must be an asshole to go to the company gym after filing for bankruptcy.

Regulatory Arbitrage, Negative Basis Trading, AIG and Goldman

Thanks to the Credit Crisis, the interested general public now have a peep hole into the guts of the dead / near dead investment banks and their accomplices. How these people were making billions of dollars in earnings is truly fascinating. One FT article that talks about a strategy that worked until it didn't is below.

Paul Kedrosky at Infectious Greed posted yesterday on how the US bailout of AIG “saved the European banking system”.

He picks up on a report from the Centre for European Policy Studies:

The AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe.

Yves Smith at Naked Capitalism also has a post.

It’s all true, but it’s only one half of the story. This kind of “regulatory arbitrage” is not just a game played in Europe. More or less every Wall Street bank does it - did it - too.

Under the Basel II capital rules securities have risk weightings based on their risk ratings. The riskier a security, the more capital a bank must set aside as a regulatory requirement. In the case of securitised securities, the standard Basel II risk weightings look like this:

(Tangentally, if it isn’t already, it should be pretty clear how absolute devastating mass rating agency downgrades can be to banks’ balance sheets)

This exciting table, however, isn’t the whole story.

And so we turn to the Basel II Accord, Part 2, section IV, subsection D, rule 4, paragraphs 583-588: treatment of credit risk mitigation for securitisation purposes.

Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting.

…

586. Credit protection provided by the entities listed in paragraph 195 may be recognised. SPEs cannot be recognised as eligible guarantors.

587. Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in paragraphs 189 to 194, banks can take account of such credit protection in calculating capital requirements for securitisation exposures.

588. Capital requirements for the guaranteed/protected portion will be calculated according to CRM for the standardised approach as specified in paragraphs 196 to 201.

In non-Basel speak: if you own a risk weighted security, you can reduce its regulatory risk weighting by hedging against it using credit derivatives. A bank could thus own a security rated BBB (implied risk weighting: 100%) but using sufficient hedging -with, for example, AIG - treat the security as if it was rated AAA (implied risk weighting: 20%).

As noted, it wasn’t just Europe cashing in on this trick. Wall Street banks were huge players. Take Merrill Lynch, for example. Merrill virtually wrote its massive, $40bn+ billion subprime CDO out of regulatory existance using a negative basis trade - the fancy phrase that describes buying a security, and then using a hedge to offset its regulatory capital impact (while still skimming the spread of the bond yield over the hedge payments).

The difference between Europe’s banks and America’s in regard to the regulatory arbitrage trade is that by and large, European banks hedged with more reliable counterparties. Wall Street tended to use the monolines.

As the monolines went down, a lot of Wall Street’s banks saw their negative basis trades unwind.

With - it should be noted - the exception of one big player: Goldman Sachs. In an article in the NYTimes last week, it was stated that Goldman had hedges on around $20bn of securities with AIG:

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements.

So the US decision to bailout AIG might have saved Europe’s banks - but it had a much more direct aim of saving Goldman too.

A blunt metric for observing a bank’s dependency on negative basis trading might be to look at leverage and compare it to capital ratios. If the two are out of sync (with, perhaps, a sector average) it might imply excessive hedging to reduce capital requirements in some way.

Negative Basis trading sounds very much like the investment bankers getting a free lunch at the expense of tax payers - in the form of an implicit put against the collapse of the financial system. Also the link between Goldman and AIG puts the rescue of AIG into perspective. Goldman is the quintessential well run company which just can't be let go. The confidence in US is at stake here.

The reluctance of the ratings agencies to downgrade the monolines earlier this year once again makes sense. In one fell swoop, the banks would all be ridiculously under capitalized. Truly fascinating once in a lifetime events.

PS: Paul Kedrosky and Yves Smith are suggested reading above.

TARP - How effective could it have been?

Going by what Barrons has to say, Not very much... The key lies here.

Indeed, TARP's $700 billion total only represents about 12% of non-Fannie Mae and Freddie Mac mortgages. Astoundingly, some investors are concerned some companies that need the money may not participate in the plan due to Congressional decisions to limit the pay of executives whose companies sell troubled assets to the federal government.

Just 12%? I mean we are not even talking about Commercial Real Estate, Leave only credit cards auto and other loans... Not a good sign at all.

The whole article is worth reading...

THANKS VERY MUCH for not very much. So sayeth the options, stock, and credit markets about the U.S. government's proposed $700 billion rescue of Wall Street.

"It's not going to stop global-recession worries," says one derivatives strategist at a major investment bank, requesting anonymity. "It may put a floor on the price of some of the financial stocks, but it's not going to fix the other problems in the economy like consumer spending and the downturn in the housing market."

Even with near-certain passage of almost $1 trillion to buy ill-conceived financial products from teetering Wall Street firms and banks, Wall Street wants even more money. Many investors feel European lawmakers also need to adopt rescue plans for their troubled financial institutions.

Already, Fortis, Belgium's largest retail bank, received a $16.4 billion government bailout. Germany's second-largest commercial property lender, Hypo Real Estate Holding, got a credit line of $37 billion to $44 billion from various banks. Britain's nationalized lender Bradford & Bingley is taking over a $91 billion loan and mortgage portfolio.

Investors suffer when Wall Street does not get what it wants. Stocks are sharply lower in Asia and Europe, and U.S. investor risk perception has sharply increased since Friday, rather than declining as many had hoped, ahead of Congress voting into law the Troubled Asset Relief Plan, or TARP.

One popular measure of investor sentiment, the Chicago Board Options Exchange's Market volatility Index (VIX) is sharply higher as U.S. stocks are sharply lower. The options-market fear gauge rose 14% and is trading at almost 40, telegraphing concern that the Standard & Poor' 500 Index is likely to tumble even lower during the next 30 days.

If Congress spends too much time debating TARP, or adding amendments to the bill's language, stocks will likely decline even further. Consider this a form of green mail.

Anyone who thinks VIX at 40 is a magic number that represents extreme panic in the market is sadly mistaken. The panic in the marketplace is now largely driven by the credit markets. Anyone who relies solely on equity risk barometers to inform investing decisions will likely lose even more money.

"All the various risk metrics used to analyze asset classes are up sharply," Goldman Sachs' derivatives strategists advised clients this morning.

The strategists say one-month implied volatility is up an average of 52% across global equity indexes since Aug. 1. The gains are even higher in Germany and England. Implied volatility on the DAX 30, essentially Germany's version of the Dow Jones Industrial Average, is up 66% since August while the FTSE is up 65%.

The TED spread, or the difference between three-month LIBOR and three-month Treasury bill rates, is up more than 3% since Sept. 17, which might seem subdued though it the highest level since 1987. The increase demonstrates a "mass flight to quality" to assets that offer safe harbor, such as government debt.

Indeed, many investors are terrified that the U.S. government's rescue plan may be ineffective. "TARP or Trap," is how Credit Suisse's Andrew Garthwaite glibly summed it up for clients in a Monday morning advisory note.

He says the plan is incrementally positive as it could postpone, mark-to-market accounting rules, pending Securities and Exchange Commission approval, while also reducing funding and mortgage guarantee burdens. On the other hand – and this helps explain why so many investors are so panicked about the future – Garthwaite says the government's plan is too small, and lacks direct capital injections into banks. Also, the plan lacks a badly needed U.S. fiscal stimulus package.

Indeed, TARP's $700 billion total only represents about 12% of non-Fannie Mae and Freddie Mac mortgages. Astoundingly, some investors are concerned some companies that need the money may not participate in the plan due to Congressional decisions to limit the pay of executives whose companies sell troubled assets to the federal government.

TARP may not be a tar pit, but it could be just as sticky.

McDonalds & US creditworthiness

Via Naked Capitalism

FT Alphaville reports that credit default swaps spreads on the US has risen further . I couldn't resist the lead sentence:

The US has been so hurt by the financial turmoil that markets now view its credit worthiness as akin to - or even worse than - that of McDonald’s, a shocking fact even if you believe that both are fronted by clowns.

One broker quoted McDonald’s CDS at about 26.5 basis points, compared with 30bp for the US, on Friday morning and another desk quoted both about 25bp. The picture has worsened since the news that politicians and public servants in Washington failed to seal a financial bail-out deal on Thursday night. McDonald’s closed at 28bp versus 25bp for the US on Thursday, according to Markit.

Quotable Quote from Warren Buffett

It's nice to have a lot of money, but you know, you don't want to keep it around forever. I prefer buying things. Otherwise, it's a little like saving sex for your old age.'

-- Warren Buffett explaining his support for the Paulson plan, plus justifying his Goldman Sachs investment (Bloomberg)

Hat Tip Infectious Greed

Correction on Conflict of interest

From the same source where I got my information on Paulson. Thank God, we have not stooped down to such levels.

A number of folks, including a colleague of mine, have gently chided me for providing incorrect information about Paulson. Apparently he was required to divest himself of Goldman Sachs stock in the summer of 2006 after all (he probably wasn't thrilled to see the price nearly double after that, but in retrospect, he got out at a pretty good price - - and with taxes deferred, no less!). Thanks Andrew, Rob, and Jonathan for letting me know.

Mother of all Conflicts of Interest

Wow.. This is plain amazing..

Something else I learned that I didn't know is that Hank Paulson has $500,000,000 in Goldman Sachs stock (at current prices; it was a billion bucks before). Ummm, help me understand this. Some poor shchlub in government can lose his job if he has a few thousand bucks in a company that represents a conflict of interest. And yet Paulson is permitted to own half a billion dollars of a stock whose fate he basically has utter control over? Jesus!

Drinking and Social Security

From the Economist...

A THOUGHT as the nation's journalists, policymakers, and bankers (employed and otherwise) head out for the weekend to drown their sorrows (Lehman) or toast their good fortune (everyone who bought financial shares yesterday morning), from Freakonomics:

A 2004 study by Frank Sloan and Jan Ostermann at Duke University found that heavy drinkers contribute slightly more to Social Security, through their higher average lifetime earnings, than nondrinkers do. What’s more, since alcohol abusers tend to die sooner than moderate or nondrinkers, they draw less money, over time, from the Social Security trust fund.

Their conclusion: the elimination of heavy drinking (three or more drinks a day) from each successive group of American 25-year-olds would cost the Social Security trust fund $3 billion over the cohort’s lifetime.

Having burdened taxpayers with billions, if not trillions, in bailout costs, you owe us this, junior investment bankers of Wall Street.

Reliance and Spielberg...

Its interesting to see where Reliance is going these days... Last time I was in India, I saw reliance Jewellery, Reliance Footwear among other usual suspects...


http://online.wsj.com/article/SB122184686199857559.html?mod=testMod

Is Chrome install messing with IE?

I recently install Google Chrome and have liked the experience so far. However, I kind of noticed something a little disturbing.

I use the Internet Explorer to upload my photos to picasaweb. Turns out that google has a really neat activex plugin that make it really easy to upload the pics to picasaweb. The screenshot of IE looks like this....



The question though is that ever since I installed chrome, this option is not awailable. Whatever happened? Removing chrome did not help either.

Something is fishy....

PS: There might be a million reasons FOR using picasa app. But unadvertised - unintended consequences of installing always irks me....

Funniest political article in a long time...

http://www.campaignsandelections.com/webedition/page.cfm?pageid=1485&navid=5