global financial crash yay!

[IdleRich]

"I agree. I don't think it's anything fancy. Not to drop names or nuffin' but I spoke to Taleb about his trading strategy a few years ago - IIRC, he said that the toughest thing about it is that it runs counter to most traders' natural instincts. The options he buys are deep out-of-the-money, so they're cheap and most of the time they expire worthless - so the strategy basically racks up lots of small losses and occasionally makes a spectacular gain.
I think. I'm not all that clued-up on options."

I think that out of the money options do trade at a premium compared to other options in general though. I just said that the price of an option is equivalent in some sense to its implied volatility but, to contradict myself slightly, very out of the money options (especially puts which you can hedge by buying stock and thus avoiding going short) tend to trade at a higher implied volatility than options closer to the price at which the share is trading. Obviously this doesn't make sense as they are both derivatives of the same stock which can presumably only have one volatility at any given time but this difference (called skew) is generally thought to be related to the way that most traders put an extra value on the protection from risk or ability to profit from large market swings that these options provide. I'm guessing that your friend(!) thinks that the skew isn't sufficient and has been trading accordingly - and who would argue with him? That would pretty much go in line with his beware of the unexpected philosophy I guess.

 

[vimothy]

When does recession become depression, technically?

There is no technical definition of depression, AFAIK. 'Depression' is merely what people used to call a recession -- if you graph GDP growth over time and it goes V-shaped or U-shaped or L-shaped, it looks like a 'depression' of growth. Nowadays I guess people use the term to mean a more severe recession, for instance a long-term stagnant, L-shaped recession like Japan experienced in the 1990s.

There are similarities between now and the Great Depression, for instance: a severe stock market crash, rapid asset deflation, banking collapse, etc. But obviously we're a lot more developed and have all sorts of safety nets -- people aren't going to be living on the train tracks and eating three day old rat for tea just yet.

There's a kind of self-fulfilling prophecy aspect to panics -- like inflation, if you and everyone else expect it, give press-conferences about it, write op-eds demanding action, it will come. And maybe some of Wall Street's princes have fallen on their swords, but most banks seem to have done ok out of holding a gun to the heads of governments around the world.

 

[vimothy]

I agree. I don't think it's anything fancy. Not to drop names or nuffin' but I spoke to Taleb about his trading strategy a few years ago - IIRC, he said that the toughest thing about it is that it runs counter to most traders' natural instincts. The options he buys are deep out-of-the-money, so they're cheap and most of the time they expire worthless - so the strategy basically racks up lots of small losses and occasionally makes a spectacular gain.

That's basically the strategy he outlines in The Black Swan: trying in some way to reverse typical trading returns, i.e. making steady money over a number of years and then seeing everything wiped out in one huge unexpected crash.

 

[crackerjack]

Bush Calls For Panic

10:00AM ET | WASHINGTON

Many call the plan Bush's most well-thought-out proposal to date which calls for hysterical fear, dry heaving, and the legalization of trampling.

http://www.theonion.com/content/index

 

[nomadthethird]

I'm getting annoyed by the miserable dribble of self-serving wank issuing from the apologists for the banks. Bad deal for shareholders my arse. They backed companies that didn't know what they were doing and exposed themselves to massive, and patently obvious for the last decade, agency risk. Now the tax payer has put itself in hock for the next ten years or more to save the bank and leave them with a chance of making their money back. And still they expect more!

^^^^^^


I can't stand this either. If I had a dime for every pundit on TV who tries to lay blame on the citizens who had the nerve to (gasp) want a home and apply for a mortgage I'd be Warren Buffet by now. Did average individual citizens approve themselves for mortgages that were several thousand dollars bigger than they could afford? Nope. [Is it somehow wrong to need a house to live in and apply for a mortgage? I can't figure how.] Did average citizens inflate the price of housing beyond all reason themselves? Nope.

Next they'll blame the price of groceries and citizens' inability to afford them to what Jay-Z called "that gotta eat fetish"...

 

[IdleRich]

"Did average individual citizens approve themselves for mortgages that were several thousand dollars bigger than they could afford?"

Well, some of them did actually but they were only taking advantage of the system that the banks put in place. Apparently self-certified mortgages are now being called "liars loans".
Unbelievable that Lloyds and RBOS are trying to renegotiate terms with the government. Maybe agreeing to buy HBOS doesn't look like such a good deal for Lloyds now but they agreed to it a few weeks back and that's just how business works isn't it? You make a decision and sometimes it works out well and sometimes it goes against you, the whole system is based on trust that if it doesn't work out the way it planned you still have to honour it. Who cares if the government stake is a bad deal for shareholders anyway (and I say that as a shareholder) - yes a company's first loyalty is to its shareholders but the government's isn't and by going cap in hand to the government the company has to make some concession to the body that's saving them. Some shareholders seem to think that the government is putting money into Lloyds to prop up the share price rather than to save the banking system. I love the way that the Small Shareholders Association or whatever it's called has released a statement to the effect that this is a socialist grab of profitable institutions by a left-wing government - haven't they been reading the news for the last ten years? That goes counter to every way Labour have acted since they came to power.

 

[IdleRich]

But Lloyds is the second biggest climber on the FTSE today - I guess that means that people think they will be able to renegotiate (unless they have already and I've missed it). Hasn't done HBOS any good though, that's still going down along with everything else, the FTSE has pretty much given back all of its gains of the last few days and is back below 4000. What next, another interest rate cut could be on the cards I guess.

 

[nomadthethird]

Well, some of them did actually but they were only taking advantage of the system that the banks put in place. Apparently self-certified mortgages are now being called "liars loans".
Unbelievable that Lloyds and RBOS are trying to renegotiate terms with the government. Maybe agreeing to buy HBOS doesn't look like such a good deal for Lloyds now but they agreed to it a few weeks back and that's just how business works isn't it? You make a decision and sometimes it works out well and sometimes it goes against you, the whole system is based on trust that if it doesn't work out the way it planned you still have to honour it. Who cares if the government stake is a bad deal for shareholders anyway (and I say that as a shareholder) - yes a company's first loyalty is to its shareholders but the government's isn't and by going cap in hand to the government the company has to make some concession to the body that's saving them. Some shareholders seem to think that the government is putting money into Lloyds to prop up the share price rather than to save the banking system. I love the way that the Small Shareholders Association or whatever it's called has released a statement to the effect that this is a socialist grab of profitable institutions by a left-wing government - haven't they been reading the news for the last ten years? That goes counter to every way Labour have acted since they came to power.

Huh, never heard of self-certified mortgages. Are these available in the U.S.?

Do you think capitalizing banks is going to work as well as people are thinking it will? Seems like Paulson recently jumped on the British strategy bandwagon after denying that this was even a remote possibility a week before...

 

[IdleRich]

"Huh, never heard of self-certified mortgages. Are these available in the U.S.?"

I dunno actually, I'll have to find out. I guess your point still stands, by allowing self-certified mortgages a bank is guilty of giving money to anyone. Just because they chose not to know the status of people they were lending to it doesn't absolve them of the crime of reckless lending.
I just did a quick google and got loads of adverts (surprisingly enough) for the things but I would like to read a more neutral perspective. Not now though, I'm too knackered. I'll read more about it tomorrow because I've realised how little I know.

"Do you think capitalizing banks is going to work as well as people are thinking it will? Seems like Paulson recently jumped on the British strategy bandwagon after denying that this was even a remote possibility a week before..."

Well, that's the question isn't it. Depends on what you mean by work as well. Seems that at the moment the shareholders are pissed off and the banks no longer look as though they are about to collapse so in terms of preventing the whole thing falling over without giving away the taxpayers' money on a cushy deal that sounds promising. I reckon that true answer will not be known for years (if ever) but if it all gets paid off fairly painlessly then that will be something I suppose. Even if it does turn out to be the right decision at the time then there is still a lot to be asked about how it got to the situation where that was the best decision.

 

[IdleRich]

Just a quick google and I found this article from 2004, funny how they identify Northern Rock, or maybe not I guess

http://news.bbc.co.uk/1/hi/business/3478635.stm

Some mention of US stuff here although it's not clear if it's exactly the same

http://www.guardian.co.uk/business/2007/sep/30/5

 

[vimothy]

Huh, never heard of self-certified mortgages. Are these available in the U.S.?

There's worse shit than that -- negative amortisation probably being the worst of all, reeking of bubble-short-sightedness, but also jumbo mortgages, so-called 'NINJA' mortgages, and the unfortunate vintage of subprime hybrid shifting from teaser fixed to adjustable just as interest rates got hiked... I'm reading a paper by someone from the St Louis Fed and they show that over the last six years about 55% of all subprime mortgages issued were to extract cash by refinancing an existing mortgage into a larger loan! Most hilarious though is a law in the US (I'm trying to remember what it's called) that efectively gives homowners a free option on their homes: if they can't make payments they can just hand over the keys and walk away.

EDIT: Add to that the whole MBS and CDO securitisation market that encourages lenders to lend recklessly, securitise up and pass the buck to some other idiot.*

*Only some of the buck, though -- still kept some tranches for themselves! Funny, that...

 

[nomadthethird]

These NINJA mortgages make certain things make a lot more sense to me now...one of them being how people who lived in "single family units" in Brooklyn/Queens got mortgages.

As for the "handing over the keys and walking away"...isn't this called deed-in-lieu or something? Where you negotiate handing over the deed to someone in lieu of foreclosure?

 

[...]

This is one way to retire.

 

[vimothy]

Fucking hell:

Lahde became one of the biggest names in the investment industry when one of his funds produced a return of 866% last year, largely by forecasting the US home loans industry would collapse.

My kind of guy:

In his farewell letter, which concluded with an appeal for the legalisation of marijuana...

 

[vimothy]

Not sure if this wants to go in this thread or in the US elections thread. Relevant to both.
http://www.ft.com/cms/s/0/23210f82-9ae2-11dd-a653-000077b07658.html

 

[IdleRich]

Interest rates cut by 1.5%

 

[vimothy]

In the UK? King's a bit mad, isn't he?

 

[matt b]

he's playing a tactcal game of tron

 

[dubble-u-c]

http://ftalphaville.ft.com/blog/2008/11/06/17932/the-first-ib-xmas-card-has-arrived/

 

[jambo]

Mandelbrot & Taleb reckon it's worse than you realise.