First Banker to commit suicide due to this credit crisis.
A grim and real reminder that maybe there's no soft depressions, only hard..
A grim and real reminder that maybe there's no soft depressions, only hard..
The soft depression that we had to have
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I cant help but think that the good times of easy money have led us into mass denial!
How is the biggest shock to the global economies a credit 'crunch', it sounds like breakfast cereal, or soft depression. These terms all seem to PC to me, not wanting to shock or offend. From what I have read of the 30's (I wasnt there) it was much the same, with everyone trying to predict the bottom all the way down down down.
Sure throwing money at the situation might help for a while but people and habbits dont change with out a catharsis. I really dont want to sound like a nay sayer and dont want to dribble about the sky falling in however I do agree that some tough times are upon us especially those that borrow excessively.
That may not be me and you but it will be for people that have borrowed up to their eyeballs in their quest to 'have everything'.
If values fall 10% most will ride it out but what about 20%. Having contingencies and planning ahead for a worst case senario (omg 40%, America,Japan) will see us ride out the storm and set sail to new prosperities on the other side be that in 2,5,10 years time, who knows?
How is the biggest shock to the global economies a credit 'crunch', it sounds like breakfast cereal, or soft depression. These terms all seem to PC to me, not wanting to shock or offend. From what I have read of the 30's (I wasnt there) it was much the same, with everyone trying to predict the bottom all the way down down down.
Sure throwing money at the situation might help for a while but people and habbits dont change with out a catharsis. I really dont want to sound like a nay sayer and dont want to dribble about the sky falling in however I do agree that some tough times are upon us especially those that borrow excessively.
That may not be me and you but it will be for people that have borrowed up to their eyeballs in their quest to 'have everything'.
If values fall 10% most will ride it out but what about 20%. Having contingencies and planning ahead for a worst case senario (omg 40%, America,Japan) will see us ride out the storm and set sail to new prosperities on the other side be that in 2,5,10 years time, who knows?
More banks fail as the egg heads look on helplessly
Last week we had the regulators in the U.S. seize Washington Mutual and hand the shell to J.P. Morgan see link below;
http://online.wsj.com/article/SB122256539004883001.html?mod=special_page_campaign2008_mostpop
And in the UK Bradford and Bingley are about to be nationalised, see link below
http://news.bbc.co.uk/1/hi/world/7640143.stm
The music has stopped.
Last week we had the regulators in the U.S. seize Washington Mutual and hand the shell to J.P. Morgan see link below;
http://online.wsj.com/article/SB122256539004883001.html?mod=special_page_campaign2008_mostpop
And in the UK Bradford and Bingley are about to be nationalised, see link below
http://news.bbc.co.uk/1/hi/world/7640143.stm
The music has stopped.
Arthur De Vany's Solution
Saving Capitalism from the Capitalists
Credit Collapse. What Credit Collapse?
Pricing Mortgage Securities When Nobody Knows Anything
Everyone will admit that nobody really knows what the mortgages or the securities derived from them are worth. The market is illiquid to an extreme. The proposed bail out makes it rational to wait to unload them to see what the seller can get later. So, the plans being discussed to reinject liquidity to the market are having the opposite effect. It is making the market go away until mortgage holders can see what the Treasury will pay for them later.
As William Goldman famously said of movies, nobody knows anything when it comes to predicting what a movie will earn when it finally reaches the market. I showed in my book, Hollywood Economics, that the way to solve the problem of unpredictable results is to set the price later when you do know. How is that done? Well, to use the movies as an example, you make contingent contracts that pay based on the revenues a movie earns after it is released. Virtually all the industry’s contracts follow this principle, which I call the Option Principle. Designing option-like contracts lets you pay when you do know.
It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns. At each strike point, the option would pay a percentage of the value of the asset.
The option would be designed so that the buyer earns a share of the future value of the mortgage security if it rises. The option would be of no value and would not be exercised if the value of the mortgage security fails to exceed the first, lower strike price. The homeowner also should receive a share of the future appreciation. This would give all the parties to the mortgage a share in the future appreciation. Had options of this sort been issued at the initial purchase of the home, the speculative aspect would have been properly separated from the homeowner aspect and this whole mess would not have happened. The homeowner/speculator would have sold all or some of the risk of future appreciation to the market.
So, through the use of the call options on appreciation, the security holder, the homeowner, and buyer of the option could all share in the future appreciation of the home. This creates good incentives for the homeowner to stay with the mortgage. The cash proceeds of the sale of the option would be shared by the mortgage holder and the homeowner. This gives the holder and the homeowner immediate cash which can be used to pay the mortgage and for the holder to improve the balance sheet.
This set up could also be used by the Trust if the government sets one up to acquire underperforming mortgages. In this case, the government buys the option rather than the mortgage and shares in the future increase in value when and if the market improves. Thus, a well-designed option would share the benefits of future values among the three parties at risk: the government, the mortgage holder, and the homeowner.
A simple relaxation of regulation on banks and mortgage regulation would enable this solution. Banks have to have the authority to buy options, mortgage companies have to have authority to issue options, and investors of all stripes should have the authority to buy the options.
In its basics, this solution is not far removed from a shared appreciation scheme that I think Barney Frank and John McCain have proposed.
My company, Extremal Security Partners, has many of these issues solved since we are on the verge of launching what we call a Stable Option for motion pictures on a major options exchange. It would be simple to take these principles and create a Mortgage Options market to implement the Frank/McCain proposal and spare the public treasury the hit it seems to have coming under the Paulson Plan. Putting Mortgage options on a liquid and visible exchange would restore much of the liquidity to the mortgage and mortgage securities market that is so sorely lacking. I think it would solve most of the present crisis.
Arthur De Vany
Saving Capitalism from the Capitalists
Credit Collapse. What Credit Collapse?
Pricing Mortgage Securities When Nobody Knows Anything
Everyone will admit that nobody really knows what the mortgages or the securities derived from them are worth. The market is illiquid to an extreme. The proposed bail out makes it rational to wait to unload them to see what the seller can get later. So, the plans being discussed to reinject liquidity to the market are having the opposite effect. It is making the market go away until mortgage holders can see what the Treasury will pay for them later.
As William Goldman famously said of movies, nobody knows anything when it comes to predicting what a movie will earn when it finally reaches the market. I showed in my book, Hollywood Economics, that the way to solve the problem of unpredictable results is to set the price later when you do know. How is that done? Well, to use the movies as an example, you make contingent contracts that pay based on the revenues a movie earns after it is released. Virtually all the industry’s contracts follow this principle, which I call the Option Principle. Designing option-like contracts lets you pay when you do know.
It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns. At each strike point, the option would pay a percentage of the value of the asset.
The option would be designed so that the buyer earns a share of the future value of the mortgage security if it rises. The option would be of no value and would not be exercised if the value of the mortgage security fails to exceed the first, lower strike price. The homeowner also should receive a share of the future appreciation. This would give all the parties to the mortgage a share in the future appreciation. Had options of this sort been issued at the initial purchase of the home, the speculative aspect would have been properly separated from the homeowner aspect and this whole mess would not have happened. The homeowner/speculator would have sold all or some of the risk of future appreciation to the market.
So, through the use of the call options on appreciation, the security holder, the homeowner, and buyer of the option could all share in the future appreciation of the home. This creates good incentives for the homeowner to stay with the mortgage. The cash proceeds of the sale of the option would be shared by the mortgage holder and the homeowner. This gives the holder and the homeowner immediate cash which can be used to pay the mortgage and for the holder to improve the balance sheet.
This set up could also be used by the Trust if the government sets one up to acquire underperforming mortgages. In this case, the government buys the option rather than the mortgage and shares in the future increase in value when and if the market improves. Thus, a well-designed option would share the benefits of future values among the three parties at risk: the government, the mortgage holder, and the homeowner.
A simple relaxation of regulation on banks and mortgage regulation would enable this solution. Banks have to have the authority to buy options, mortgage companies have to have authority to issue options, and investors of all stripes should have the authority to buy the options.
In its basics, this solution is not far removed from a shared appreciation scheme that I think Barney Frank and John McCain have proposed.
My company, Extremal Security Partners, has many of these issues solved since we are on the verge of launching what we call a Stable Option for motion pictures on a major options exchange. It would be simple to take these principles and create a Mortgage Options market to implement the Frank/McCain proposal and spare the public treasury the hit it seems to have coming under the Paulson Plan. Putting Mortgage options on a liquid and visible exchange would restore much of the liquidity to the mortgage and mortgage securities market that is so sorely lacking. I think it would solve most of the present crisis.
Arthur De Vany
you left out Fortis, the Belgian Bank NR
Thank you Winston that one flew under my radar. I need to check the financial times more often
http://money.cnn.com/2008/09/28/news/international/fortis_nationalized.ap/index.htm
I think Bloomberg does a reasonable job of staying on top.
They do some great interviews as well.
And Barry Ritholtz is timely in pointing out media and self interest spin.
Good question, suddenly those oldies with their cash under the mattress don't seem so paranoid.
After a sale this year I've spread cash in 6 different institutions, scary it has come to this where you worry about the banks themselves.
I have a large portion of cash as well and took it out of Bankwest on this concern. Into CBA Netbank Saver but them to offset against IP LOC so max tax benefits and if they cannot lose as in worst case my IP LOC loan is permanent drop.
Peter
PS I note this means I still have IP loans.
trouble is with that mentality - nothing ventured, nothing gained.
This market is about survival, not risk/venture taking
Nasty stuff.
Have-a-go millionaire Barclays boss beaten to death while breaking up fight at taxi rank
Have-a-go millionaire Barclays boss beaten to death while breaking up fight at taxi rank
Know your history so you don't repeat it
Here is an interesting link about the 1873 world depression that has more similarities than the 1930's depression;
http://chronicle.com:80/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
Here is an interesting link about the 1873 world depression that has more similarities than the 1930's depression;
http://chronicle.com:80/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
More similarities to what?
Its just someone elses observation, doesnt mean it correct
If it waddles like a duck and quacks like a duck its not a chicken
Try sucking on this
If you read the weekend Australian financial review on page 22 and 23 on perspective market turmoil there was an excellent article entitled "The simple tool that sank the banks".
Of course it was a computer program that all banks here and overseas used called a VaR model value at risk
The use and abuse of this computer risk modelling was the single greatest contributor to the financial crisis now threatening the global banking system. The model predicts with 99 percent (sic) probability that institutions cannot lose more than a certain amount of money......
This is the same nonsense that the tree hugging global warming fruit cakes use, again via computer modelling. The world has gone mad with the egg heads using complex maths as the new pseudo religion. Common sense just isn't very common anymore even when it is there in black and white.
Lurking behind the banks VaR model was a colossal conceptual error; the belief that risk is randomly distributed and "that each event has no bearing in the next event in a sequence" Seems that they didn't understand Fitzpattricks Law, that Murphy was an optimist
Here is another little gem for you if you don't think that we are up to our eyeballs in s***. Mr Rudd and his finance minister are telling us how sound our banking system is right? Leaving aside home lending, what about other exposures by Australian banks, such as positions taken in various derivatives products included in their consolidated off-balance sheet business?
A table in The RBA's September bulletin puts Australian banks total off-balance sheet business at the end of June at 13.8 trillion compared with 5.8 trillion in June 2003. Many of these derivatives contracts involve overseas counterparties.
So you see because we are in a globalized economy our banks are in that house of cards and our pollies are telling more porkies. Just to give you another reference point. From memory I think the total Australian property market is valued at something like 3.7 trillion dollars and our ASX share market is worth something like 1.7 trillion dollars.
Sooooo the next time you hear that porkie about how the storm clouds are going to pass us by remember the term counterparty risk and offer them a fishermans friend
If you read the weekend Australian financial review on page 22 and 23 on perspective market turmoil there was an excellent article entitled "The simple tool that sank the banks".
Of course it was a computer program that all banks here and overseas used called a VaR model value at riskThe use and abuse of this computer risk modelling was the single greatest contributor to the financial crisis now threatening the global banking system. The model predicts with 99 percent (sic) probability that institutions cannot lose more than a certain amount of money......
This is the same nonsense that the tree hugging global warming fruit cakes use, again via computer modelling. The world has gone mad with the egg heads using complex maths as the new pseudo religion. Common sense just isn't very common anymore even when it is there in black and white.
Lurking behind the banks VaR model was a colossal conceptual error; the belief that risk is randomly distributed and "that each event has no bearing in the next event in a sequence"
Seems that they didn't understand Fitzpattricks Law, that Murphy was an optimistHere is another little gem for you if you don't think that we are up to our eyeballs in s***. Mr Rudd and his finance minister are telling us how sound our banking system is right? Leaving aside home lending, what about other exposures by Australian banks, such as positions taken in various derivatives products included in their consolidated off-balance sheet business?
A table in The RBA's September bulletin puts Australian banks total off-balance sheet business at the end of June at 13.8 trillion
compared with 5.8 trillion in June 2003. Many of these derivatives contracts involve overseas counterparties.So you see because we are in a globalized economy our banks are in that house of cards and our pollies are telling more porkies. Just to give you another reference point. From memory I think the total Australian property market is valued at something like 3.7 trillion dollars and our ASX share market is worth something like 1.7 trillion dollars.
Sooooo the next time you hear that porkie about how the storm clouds are going to pass us by remember the term counterparty risk and offer them a fishermans friend
