Thursday, April 30, 2009

Learning from Our Mistakes

While irresponsible media outlets are busy proclaiming the end of a 'short, sharp' recession, the US yesterday officially entered into the worst one it has experienced in 50 years. The economy slowed by 6.1% in the first quarter with the biggest drop in exports in 40 years. Consumers are reining in spending, perhaps permanently, as a 'new frugality' begins to bite. Meanwhile investment banks are going hell for leather backwards, trying to regain their status as big swinging dicks in the trading world, and to get their pay packets back to 'normal', i.e. obscene. Have they learned anything from their mistakes? I ran into quantitative finance guru Paul Wilmott yesterday in Boston, where he is promoting his masters' class for quants. Paul said nothing has really changed since the financial crisis. Banks don't do proper stress testing of their own portfolios, because they don't want to know the answer. Wilmott developed a model in 1995 - called Crash Metrics - for testing just the kind of scenario we have so recently experienced. But few, if any, banks employed it. Paul said: "My fear is that we'll go back to where we were [before the crisis]. Now the papers are onto swine flu." Plus ca change...

Wednesday, April 29, 2009

The Unbearable Lightness of Being Thick

The headlines are screaming "Banks Need More Capital". Reeaalllyyy?? Being leveraged by a gazillion percent isn't enough anymore? But wait. Isn't that what the Bank for International Settlements told them - oh, I don't know - 5 YEARS ago? The Basel II accord was originally designed in 2004 to provide the international banking system with a framework for capital adequacy. This was intended to help PREVENT the kind of meltdown we have recently experienced. But American banks said, 'Wait a minute! We have to have CASH MONEY? No way, tell the Swiss to adios.' But the pressure from their overseas conterparts was too strong, so the American banks said "OK. We can do this. As long as you LOWER the capital requirements.' Which BIS did. US banks were supposed to begin to adhere to their 'special' Basel II accord in January 2008. But by then the unimaginable had happened. They GOT CAUGHT WITH TOO LITTLE CAPITAL. BIS 1, US banks nil.

Thursday, April 16, 2009

Battle for Supremacy Over?

For years now financial journalists have covered the battle between Nasdaq and the New York Stock Exchange in a fight for equities market share. From its onset Nasdaq's all-electronic trading platform gained steady ground over NYSE with its open outcry and specialist model. Chris Concannon, who has headed up many of Nasdaq's technology initiatives since 2003, has always kept his eye on the prize. Beating NYSE. He oversaw Nasdaq's takeover and integration of Brut ECN and Instinet's INET ECN. But more and more of these pesky ECN's and crossing networks kept popping up - BATS, Bids, ITG, Turquoise in Europe.
The electronic edge that Nasdaq had as first mover gave it the lead, there is no question. But Concannon's departure to high frequency trading firm Virtu Financial can only mean one thing. His work at Nasdaq was done. The battle is over, and the playing field is level. Fees and commissions are the next battle ground. The new frontier is taking advantage of electronic trading using high speed algorithms. Taking fractions of pennies from billions of trades. Exploring windows of opportunity with light-speed arbitrage programmes. Let the fun begin.

Wednesday, April 15, 2009

The Future of Journalism

According to the Financial Times three German journalists managed to sneak in to the 'listening room' at the G20 conference. Way to scoop a story - good on ya, boys! Coups like this give investigative journalists hope for the future.
Journalists are taking the brunt of this recession, and layoffs are rampant. Newspapers are closing, filing for bankruptcy or scaling down. Advertising in newspapers and magazines is expected to fall by at least 10% this year. Financial journalists used to have the key to the executive washroom. We understood our markets, and our publishers reaped huge amounts of money for exclusive newsletters and papers. Since the financial crisis caught the attention of Joe Sixpack American, every newspaper, TV station, radio station and magazine in the world is suddenly a financial markets specialist. Sales of expensive, in-the-know trade publications are falling along with incoming adverts.
Maybe once the crisis is over the general public will be bored with hearing about credit default swaps. And the specialist trade publications will once again shine. Here's hoping.

Monday, April 13, 2009

Feel Good Manu-Factor

I am a glass half-empty kind of person. Even my friends call me a pessimist, but I prefer to be called a realist. Tell it like it is. Better out than in. This is why I can't quite drink the Kool-Aid and believe that this recession is over. I cannot see the 'green shoots' of recovery that the Dallas Fed and various media outlets are touting.
There are some pundits claiming that consumer spending figures, which amazingly were up last month, are 'massaged' by the government to get things moving again. (Nooooo! The government doesn't massage figures, does it?) The stock market is rallying, the S&P is up over 25% since its March 9th low, but the trading is coming purely from - well, traders. CNBC and other Kool-Aid vendors are saying it is time for the retail punters to get back in. Otherwise you will miss it!
Are people really that stupid? Are they so unwilling to admit that their over-spending habits might have had a teensy, weensy bit to do with our current mess? Do they truly have an unassailable belief that only profits can be made on their investments? If so then this financial crisis has taught them nothing. Moral hazard risk is not uniquely the domain of fatcat investment bankers.

Thursday, April 9, 2009

Welcome to my world

I am a new blogger. It seems that many freelance jobs want you to have blogging experience, so I thought I ought to get some. Seems easy so far.
On this page I will post my thoughts on whatever subject happens to catch my fancy. These blogs will be dripping with sarcasm (yes, I know - the lowest form of humor. But it's all I've got), and irony (Americans take note). I lived 20 years of my life in London, England so have a British passport and a critical view of American society as seen from abroad. Having said that, after living 20 years in Europe I also have a pretty good critical view of that particular hodgepodge of cultures. I promise to try and give equal bashing time. But Americans are such juicy targets!