Cash and Carry Trade

[peterbirks]

"Bank Changes Stance On Turmoil"

went the headline of the FT this morning. Ah-hah, I thought, clearly the Bank of England now thinks turmoil to be a good thing.

But, no, nothing so radical. The BoE merely conceded that turmoil existed. This was rather on a par with the Indonesian government denying that there had been any unusual weather activity on December 26 2005, only to change its mind when faced with amateur videos recording 20-foot waves blasting into beach resort — not that the Indonesian government did that. I'm just using it as a hypothetical example.

After levelling off at 6.6%, the three-month Libor rate followed US rates up at the beginning of this week, indicating a return of risk-aversion.

We're now beginning to get official figures coming through, so the guys in the suits no longer have to work on gut feelings. Pending sales of US homes fell by 12.2%, rather than the 2% that was anticipated, and tomorrow's non-farm payroll number could cause a rapid overreaction one way or the other. I think I've commented in the past on the insane significance appropriated to this figure by the markets. Just see how they react and then jump in about an hour or so later. There is always a bounceback.

But the most interesting development has been the emergence of a large number of operations asking investors for funds in order to buy distressed debt. Incredibly, the free market is working ... well, sort of, and not quite in the manner anticipated.

As I mentioned in the early days of this subprime meltdown, there would likely be some forced sellers of debt, and this would be an opportunity to make some cash. So it's quite nice when Goldman Sachs, Lehman Brothers, Blackstone and others agree with you.

Unfortunately, the whole thing has hit a bit of a brick wall, because the big banks seem unwilling to discount the debt by as much as the buyers are willing to pay.

This is a bit like when a housing price crash starts. What you get is not a change in price, but a loss of liquidity. Group A is willing to pay a certain amount, while Group B is unwilling to sell at that amount, because Group B's mentality is still stuck in the different times of a few months ago. Eventually the prices converge and liquidity returns.

As for the risk aversion, it struck me this morning that the reason banks are unwilling to lend to other financial institutions is because they do not know where the risk has gone. We know that, say, 95% of borrowers are fine and 5% are in trouble. The problem for the lenders is, they have no way of knowing which is which.

In other words, this is not a solvency crisis, this is a transparency crisis. This gives me the opportunity to blame Sarbanes-Oxley, and I never miss that opportunity.

Sarbanes-Oxley, in its naive attempt to increase transparency by requiring companies to reprot far more than they had to previously, created the niche in which unlisted companies with private capital, as well as structured sliced and diced products, could become more popular. What the legislators and regulators need to realize is that you canot compel transparency, because if it is in a business's interests not to be transparent, then it will find a way so to do.

What you need to do is to make transparency desirable. Then it becomes much easier to avoid companies which are not transparent, because counterparties will say to themselves "Hmm, why do they want to be opaque about this?"







I don’t think that I have ever played Aces like this before in my life, but it seemed to work for this hand. Maybe I’ll try it again, to see how it works out over a larger sample. Part of my motive was that I was unusually short-stacked (things had been going wrong and I hadn’t yet reloaded) so I couldn’t see myself laying down Aces once my pre-flop bet went in. Therefore I had to hope that the Aces won. Therefore I had to work out the best way of getting other people’s money in. I had also had a bit of “history” with Villain (from the Russian Federation) and he looked a type on whom you could rely to keep up the aggression.

$100 USD NL Texas Hold'em - Thursday, September 06,


Seat 4 is the button
Total number of players : 10
Seat 2: Miami_S_SXXX ( $70.70 USD )
Seat 3: humseper ( $97.06 USD )
Seat 4: IdiTy ( $127.09 USD )
Seat 6: Dirkules_14 ( $17 USD )
Seat 10: kophta4ever ( $121.04 USD )
Seat 5: Hero_Fish (i.e., me) ( $55 USD )
Seat 8: magnad111 ( $35.11 USD )
Seat 7: JimBeam975 ( $26 USD )
Seat 1: Ritterboerse ( $19 USD )
Seat 9: El__Diabolo ( $21.11 USD )
Hero_Fish (i.e., me) posts small blind [$0.50 USD].
Dirkules_14 posts big blind [$1 USD].
** Dealing down cards **
Dealt to Hero_Fish (i.e., me) [ A♡ A♠ ]
JimBeam975 folds.
kophta4ever has left the table.
magnad111 calls [$1 USD]
El__Diabolo folds.
Miami_S_SXXX calls [$1 USD]
IdiTy raises [$5.50 USD]
Hero_Fish (i.e., me) calls [$5 USD]
Dirkules_14 folds.
magnad111 calls [$4.50 USD]
Miami_S_SXXX calls [$4.50 USD]
** Dealing Flop ** [ 8♣, J♠, K◊ ]
Hero_Fish (i.e., me) checks.
magnad111 bets [$6 USD]
Miami_S_SXXX folds.
wolves1965 has joined the table.
IdiTy raises [$15 USD]
Hero_Fish (i.e., me) calls [$15 USD]
magnad111 calls [$9 USD]
** Dealing Turn ** [ 7♡ ]
Hero_Fish (i.e., me) checks.
magnad111 is all-In.
IdiTy calls [$14.61 USD]
Hero_Fish (i.e., me) calls [$14.61 USD]
** Dealing River ** [ 8◊ ]
Hero_Fish (i.e., me) is all-In.
IdiTy calls [$19.89 USD]
Hero_Fish (i.e., me) shows [ A♡, A♠ ]two pairs, Aces and Eights.
magnad111 doesn't show [ J♣, 9♣ ]two pairs, Jacks and Eights.
IdiTy shows [ T◊, K♣ ]two pairs, Kings and Eights.
Hero_Fish (i.e., me) wins $39.78 USD from side pot #1 with two pairs, Aces and Eights.
Hero_Fish (i.e., me) wins $108.83 USD from the main pot with two pairs, Aces and Eights.
#Game No : 6303781339




This has probably only happened to me three or four times in the past month, but surely it should happen even less often than that? Perhaps I’m just one of those people to whom it happens more often than it should (just like a pair of nines is luckier for me than it “should” be). At least I’m not getting stacked off, because against these players, you don’t stack them off with a threatened flush on the board unless they can beat you (except on the off-chance that they have a smaller flush), so you are on a hiding to nothing.

$100 USD NL Texas Hold'em

Seat 1 is the button
Total number of players : 10
Seat 3: makkerret ( $125.95 USD )
Seat 7: Miami_S_SXXX ( $75.27 USD )
Seat 9: roderidder2 ( $38 USD )
Seat 1: Hero_Fish (i.e., me) ( $97.18 USD )
Seat 5: ebbi1983 ( $21.60 USD )
Seat 10: franky64111 ( $36.95 USD )
Seat 2: Dustybin777 ( $30.31 USD )
Seat 8: El__Diabolo ( $21.99 USD )
Seat 4: RomanHLD ( $22.09 USD )
Seat 6: mdeerman ( $100 USD )
Dustybin777 posts small blind [$0.50 USD].
makkerret posts big blind [$1 USD].
** Dealing down cards **
Dealt to Hero_Fish (i.e., me) [ 9♣ J♣ ]
RomanHLD folds.
ebbi1983 folds.
Miami_S_SXXX folds.
El__Diabolo folds.
franky64111 folds.
Hero_Fish (i.e., me) raises [$5 USD]
Dustybin777 folds.
makkerret calls [$4 USD]
** Dealing Flop ** [ 4♣, K♣, 3♣ ]
makkerret checks.
>You have options at Table 132572 Table!.
Hero_Fish (i.e., me) bets [$7 USD]
makkerret calls [$7 USD]
** Dealing Turn ** [ 7♡ ]
makkerret checks.
Hero_Fish (i.e., me) bets [$10 USD]
makkerret calls [$10 USD]
** Dealing River ** [ 5♡ ]
makkerret bets [$30 USD]
Hero_Fish (i.e., me) calls [$30 USD]
makkerret shows [ A♣, Q♣ ]a flush, Ace high.
Hero_Fish (i.e., me) doesn't show [ 9♣, J♣ ]a flush, King high.
makkerret wins $101.50 USD from the main pot with a flush, Ace high.
#Game No : 6303787769

Comments

[jellymillion.livejournal.com]

There's a fun little web of interacting concerns, all contributing to the general mess.

Throw in also institutions holding on to cash because they're expecting to have problems borrowing as their short-term paper matures and can't be rolled. So more liquidity disappears. Fun fun fun.

I just found some fun reading on off-balance sheet activities here: http://www.off-balance-sheet.com/

[peterbirks.livejournal.com]

I just had a quick glance at that. I quite liked this line ...

"The SPE (special purpose entity) can even have a better rating, perhaps AAA- even if our company is rated BBB- and a lower cost of funding. "

I wish he'd cited some examples of this, because my immediate thought was "perhaps on the planet Zog..."

PJ

[(Anonymous)]

Well, surely that's what a special-purpose entity is for, isn't it? Slice, dice, et voila: AAA-. The left-over peelings are CCC-, but somebody else can always package that crap up, if only for financial compost.

Much like a long inbred person of the American upper class, of whom I have met too many to like but not enough to make money out of, these triads are designed to confer grandeur on a thing that is, on close inspection, pitiable. The American upper class tends to go for interchangeable surnames in batches of three: "Hamilton Morgan Chesapeake," for example. (Don't google him -- he was particularly nasty.) The financial equivalent is to borrow from IBM, who (in the good old days) used to insist on three-letter acronyms.

"Special purpose entities?" What's that?

Well, it's special, although not quite in the sense that Downs Syndrome children are special.

It's gorra purpose, otherwise it wouldn't be there.

And who could argue with it being an Entity? What could possibly be wrong with being an indefinable abstraction?

Unless, of course, you're trying to define it as AAA- when in fact it is a steaming pile of shite.

Perhaps the conspiracy theorists are correct, and there is in fact a "special purpose entity" out there in Area 51. If creatures from outer space are indeed interested in acquiring US assets, perhaps they are already here and going long on T-Bills.

In the mean time, I wonder why I can see £900 in my account at Lloyds yet have an ATM balance of £0.00. Is this a special-purpose entity? Is it a brick? Is the entirety of Western Civilisation imploding into a black hole of liquidity?

Nah. It's probably just Lloyds.

Well, there goes tonight's exotic "Polish Fisz'n'Chpz as you like 'em" down at the Reading FaC emporium. Pity, that: I was quite looking forwards to a bit of luxury after a day in Bracknell.

[jellymillion.livejournal.com]

I don't know how it works these days, but I helped set up a AAA Special Purpose Vehicle (which was what they were called back then) aorund 15 years back, when I was working for an A- company.

The trick in this case was to pass all market risk through to the parent via back-to-back trades, leaving only credit risk (hah - how times change) in the SPV. Then I just had to show that there was less than a 0.5% chance over 10 years of operation that losses due to default would eat the entire capital of the company. Which I did to S&P's satisfaction.

Bear in mind that the proposed trade mix in that case was fairly straighforward interest rate derivatives (swaps,caps, floors, swaptions). I do wonder what simulations were required for SIVs....

[peterbirks.livejournal.com]

Obviously my experience of special purpose entities is in the reinsurance business, where we have sidecars, captives, and securitisations. I don't think I've ever seen an SPE from a reinsurer have a higher rating than the reinsurer itself.

PJ

[(Anonymous)]

Dont think Captain Scarlet's SPV had a AA rating, buts thats going back a bit before Mikes derivative handiwork. With my investors cap on the silence from the ratings agencies about the recent problems has been deafening. I look forward to their time in the spotlight.

Keith S

[jellymillion.livejournal.com]

Here's how it might work: split your trading activity according to riskiness, then move the least risky part into a new entity with sufficient capital to assure the ratings agencies that - with suitable assurances about future activities - they'll give you a juicy rating. Having the rating then makes your new vehicle an attractive counterparty, giving it access to trades that are not be available to the parent.

Something like that - I'd be lying if I said I understood the whole thing.

[real-aardvark.livejournal.com]

Jeez, has nobody read "Liar's Poker?" (Which would be ironic, on this site.)

Give or take the inexorable effects of Moore's Law, not to mention the concomitant arrival of a bunch of unsociable and yet amenable Maths PhDs in the back office, the underlying principles here appear to be exactly the same. The basic trick is to design a confusing conglomeration of the slices you want to keep, and to polish the residual turd that you want to sell to somebody else. I would have thought that in an insanely greedy, risk-accepting market, polishing said would be trivial. It certainly seems to have been.

Ironically, and I think in this case I actually do mean ironically, two of the chief marks to be sold Friday night turds at a Saturday market are German. Just as in the original book, where I believe the chief mark was called "Hermann."

Just as ironically, the various Salomon Brothers alleged scams centred around sliced+diced mortgages.

It isn't that "some things never change," which is a pointless truism. (How many? When? Why? And, more to the point at the moment, Where?) It's that nobody ever learns.

Birks' comments on transparency are a fruitful train of thought in this respect.