Showing posts from January, 2010

Why Structured Finance?

It's a provocative meta-question that has preoccupied me a lot lately. My question is meant to be a loaded one, as in, "What is the value of structured finance?"

To start out, Wikipedia does a serviceable job of getting us going, definition-wise:
Structured finance is a broad term used to describe a sector of finance that was created to help transfer risk using complex legal and corporate entities. This risk transfer as applied to securitization of various financial assets (e.g. mortgages, credit card receivables, auto loans, etc.) has helped to open up new sources of financing to consumers. However, it arguably contributed to the degradation in underwriting standards for these financial assets, which helped give rise to both the credit bubble of the mid-2000s and the credit crash and financial crisis of 2007-2009.Okay, let's start by looking at securitization: specifically, securitization of mortgages. That's a hot topic. We'll pay a visit to a site I found ca…

The Driver of Social Change – (Epilogue)

Why did I choose an obscure dispute over the regulation of derivatives to expound on the macro themes of social change and public alienation?

The reason is that the dispute goes to the heart of the matter. It is the heart of the matter – the definition of finance, the dialectics inherent in a dispute (that is pregnant with new developments), the abstract nature of the argument (that goes over the collective head of the hoi polloi) and the uncompromising position of the parties (who know what the stakes are) – are all there.

Let us begin with the definition, which is a highlighting of relations. The definition sets the direction of the investigation by establishing the investigator's point of view, his angle of vision to reality. If it is set right, things will fall into place.

Here is a finance professor writing to the editor of the Financial Times to volunteer his unsolicited 2 cents about the crisis :

First, “finance” must not be considered as one homogeneous discipline. The tradit…

What's to Become of Shadow Banking?

I listened to Obama's new, tougher stance on the banks (limit their size, eliminate proprietary trading) with a bit of skepticism. One, I don't quite trust him the way I did, say, three days after his election, when I thought that maybe -- just maybe -- the soaring rhetoric would be matched by an iron will and an incorruptible character. I'm no longer convinced he's on the side of the average American, though he displays a masterful populist oratory at times. Is he just a political elite who swaps in and out of roles, like a skillful actor?

In this case though, there's a bigger reason for my skepticism.

Obama is missing a huge part of the problem. To be blunt, what happens to shadow banking? It has revived in impressively scary fashion since seizing up completely in the aftermath of the Lehman bankruptcy. This is a world of repos (repurchase agreements), asset-backed securities, "haircuts" and off-balance sheet vehicles. This is a world that Washington need…

Support Your Local Bank!

Sometime in December, I had a stunningly obvious epiphany: If Obama wasn't going to do anything about the banking behemoths, and Congress wasn't either because our representatives were in thrall to the lobbyists paid for by the special interests funding Congressional campaigns, I -- and millions of fellow Americans -- could act. We could vote our anger with our deposits.

And so when I recently relocated to New York, I found a nice cozy little neighborhood bank to put my money in. This bank pays a decent rate of interest on my savings. On Saturdays there's no line at the teller's window. The loan officer/manager/Kleenex box changer is usually sitting at his desk near the lobby, gazing idly out the window, ready to serve you. The place has a relaxed, down-home feel.

I figured: These are guys who played it safe, and conservative, and didn't throw buckets of money into risky securities before the financial crisis. Shouldn't they be rewarded? Shouldn't we -- the A…

Up and Running Again, Finally

New York is a major international city? Really? Out here in Forest Hills (that's Queens, New York City, for those who haven't been sucked into the metropolis), it took me five weeks to get Internet access. Time Warner wanted everything but a tissue sample from me to prove my identity, apparently because the last tenant in this apartment absconded with some of their equipment (I imagine it was the little modem that's now blinking at me that's about the size of three stacked slices of bread -- yup, that's gotta be really valuable). Okay, frustrated rant over. Back to the blog.

The Driver of Social Change (2 of 2)

This past year I spent a grim November in Zurich. Grim were the politics; Zurich is a beautiful city and I have dear friends there.

The talk of the town was the national referendum to ban the construction of minarets in Switzerland. The anti-minaret poster which itself became the subject of controversy was everywhere. It showed a woman in burka next to a cluster of minarets that looked like missiles, all juxtaposed over a Swiss flag. The message was that backwards Islam will destroy Switzerland.

On November 29, the measure passed with 57% of votes.

In the past couple of years, we have seen the variations of this theme played across Europe, most recently in France, where wearing burka was banned in school. The President of the Republic himself took a very public stand against this “symbol of oppression”.

But I couldn't help noticing the changing narrative in Switzerland. Whilst previously the talk had been around the Muslim hordes invading the idyllic European landscape, the anti-minar…

The Role of Businessmen In Shaping Events

On Sunday, The New York Times had a long article on Sandy Weill. It was the vintage Times P.R. piece, including hyped style to give the story a Homeric or Shakespearean dimension. The man who rose from a humble childhood to build Citi to a powerhouse had it all, got humiliated, now is sad, hurt, lonely, unwanted; “There is no creature loves me” stuff. He is still “baronially wealthy” (of course); he wants to be remembered for his charity work.

Sandy Weill is an easy mark for mockery. But we should resist the temptation, first, because his vulnerability makes mocking him improper, almost obscene, like an intellectual equivalent of dwarf tossing. More importantly, jesting distracts us from the larger question of the role of businessmen in shaping the events which his story can help us explore. The issue is defined in the contrasting views expressed in the article:
Though he [Weill] was once viewed as a brilliant deal-maker, some critics now cast him as the architect of a shoddily construc…

The Driver of Social Change (1 of 2)

In developing the characteristics of speculative capital, I wrote in Vol. 1:
Speculative capital is, by definition, opportunistic. It is constantly on the lookout for “inefficiencies” across markets which it can arbitrage. The opportunities arise suddenly, so the capital that hopes to exploit them must always be available; it cannot afford to be locked into long-term commitments. The requirement to be opportunistic translates into the need to be mobile, to be nomadic and interested in short-term ventures. Such are the inherent attributes of speculative capital.Then added:
Because these attributes define speculative capital, the manager of speculative capital must employ it in activities that are consistent with these attributes. This rigidly defined role turns him from being a manager of speculative capital into its agent, someone who nominally “runs” the speculative capital but must in fact follow its “agenda.” Speculative capital becomes the grammatical subject of the sentence as if i…