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.