by Frank Paynter on September 20, 2024
Berkshire Hathaway Annual Report 12/31/2002
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts. Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the
creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2024. No problem – at a price, you will easily find an obliging counterparty. [click to continue…]
by Frank Paynter on September 20, 2024
by Frank Paynter on September 20, 2024
Thanks to the friend who passed along this constructive opportunity to let Sarah know we’re thinking of her, and to do some good as well! I plan to chip in, and i hope you do too.
The smallest donation is $5: The cost: priceless.
Make a donation to Planned Parenthood in Sarah Palin’s name.
When you make a donation to PP (secure site) in her name, they’ll send her a card stating the donation was made in her honor.
Here’s the link to Planned Parenthood’s website:
http://www.plannedparenthood.org
Open ‘Donate’. Click ‘Honorary or Memorial Donations’.
Fill in your info and donation, then scroll down to ‘I would like to
give to’ -
fill in ‘Sarah Palin’ and use the McCain campaign headquarters address:
1235 S. Clark Street
1st Floor
Arlington, VA 22202
Please consider forwarding this to others, and urge them to do the same.
by Frank Paynter on September 20, 2024
Some notes…
Bear Stearns:
You remember the pump and dump, right? That’s where a certain someone buys stock in a company, then goes to message boards, chat rooms, and spam e-mail lists to talk other people into buying it. Their sudden surge in buy orders sends the stock price up, allowing the certain someone to unload his stock at a profit.
Get it? He pumped up the value of the stock, then dumped it.
The Fed: Private meetings with the playas and the Fed in June.
Lehman Brothers: WTF?
The fund’s demise is a financial blow to Lehman Brothers, which bought a 20% stake in Ospraie Management three years ago. Lehman is already struggling to cope with huge losses on the credit markets and is in the middle of delicate negotiations to raise up to $6bn (£3.4bn) of fresh capital from the Korea Development Bank.
by Frank Paynter on September 20, 2024
Here’s a pretty good article on asymmetric risk. It provides an entering wedge into understanding the delusional nature of hedge funds. Consider…
Almost, all financial derivatives display asymmetric payoffs. All sold (short) option positions and sold (short) derivatives positions - something that banks, financial institutions, hedge funds and even corporations engage in regularly these days - are negatively skewed bets. These short portfolio positions will produce negative skew for the trader. He will be fooled by the variance (volatility) of the process, as the observed variance (volatility) would be lower than the true variance most of the time. This would mean the more the skewness in the distribution (of the portfolio) the more the variance will be concentrated in a small slice of time and for most part it will generate steady returns. And the trader will think that he is making money, albeit in small proportions but steadily. And then after a while - could be a long wait - the true variance will wipe out all those gains.
by Frank Paynter on September 19, 2024
Read How To Bail Out Ordinary Mortgage Holders And Not Just Banks at Firedoglake for an equitable solution to the financial markets mess. The proposal has all kinds of upside,
a) a floor is set for mortgage prices. (Whatever discount the government is buying at. Probably 60% to 70%, but it should be based on what the long run price was in the area before the housing bubble.) This ends the confidence crisis in these securities, because there is now a market price—what the Trust will pay.
b) It helps homeowners stay in their homes.
c) It gets rid of overly complex mortgages and puts in their place a dead simple mortgage that anyone can understand.
d) It punishes lenders, which they deserve, for making loans they should never have made.
e) While it does keep homeowners in their homes, it doesn’t let them off scot-free either. In exchange for a good mortgage they can service, they give up some of the future profits on sales in their houses.
f) The government will almost certainly make a long term profit on this. This is important, because it’s not fair for people who aren’t underwater on mortgages to spend hundreds of billions or trillions bailing out those who are without some expectation that in the end it won’t be more than just a transfer of wealth to them and to investors and banks.
The downside for me is that my lender carries my mortgage in his portfolio. It was never bundled and sold to the dickwads of Fannie Mae or Freddie Mac. So what’s in it for me?
Wait! I know! (ooo Horschach moment… call on me Mr. Kotter) What’s in it for me is a stabilized financial market, a restoration of trust in the government and confidence in the future, a community with fewer homeless people and more people with a stake in that future.
The Democrats will have to grow a pair of brass ones to package a proposal like this and get it passed over the objections of Cheney and Bush. Never happen.
(Thanks anyway to Jon H. for pointing me to the article).
by Frank Paynter on September 18, 2024
Finally, an appropriate reaction.
“I first read Infinite Jest in 1998 when my gas-can man gave me a copy when I was a rookie in the Craftsman Truck Series, and I was immediately struck dumb by the combination of effortlessness and earnestness of his prose. Here was a writer who loved great, sprawling, brilliantly punctuated sentences that spread in a kind of textual kudzu across the page, yet in every phrase you got a sense of his yearning to relate and convey the importance of every least little thing. It’s no exaggeration to say that when I won Rookie of the Year that season it was David Foster Wallace who helped me keep that achievement, and therefore my life, in perspective.”
– Greg Biffle, #16 3M Ford Fusion driver
Technorati Tags: not sylvia plath
by Frank Paynter on September 17, 2024
It’s been reported that Alaska Governor Palin maintained private email accounts to avoid public disclosure of emails compelled by FOIA requests. Today Micah Sifry (techPresident) reports that some private Yahoo accounts have been hacked. Clicking through to Wikileaks, the source of Micah’s revelation, I find that once again I’m the last to know. The server at Wikileaks is being hammered and I can’t connect.
