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post #10021 of 11195
I understand your guys' feelings about the cost of funds in 401(k) plans but think you are misstating the culprit. The reason that many plans have overpriced funds is because the funds provide a portion of their management fee to the company so the company can defray the costs of running its plan. Some companies are willing to foot the bill so they offer lower cost plans. The unfortunate thing is that if you have a lot in your 401(k) you end up paying way too much in fees. I also agree that many companies could do a better job picking plans.
post #10022 of 11195
Wow, Mrs. Piob's new 457 has returned 15.3% YTD. Boo-yeah index funds!
post #10023 of 11195
Quote:
 So a rating agency's job is to rate an asset based on it's quality. These agencies are supposed to be a trusted source for judging that quality. We had an asset class that was packaged with lots of high risk mortgages, and so how did it slip the agency by that these were bundled in the asset? You seem to suggest it was happenstance, and that "mistakes were made". I tend to believe people in the ratings agency knew to some degree because ex-Goldman guys know Goldman guys, down the line where gossip circles eventually inform it. Everyone has been in a business situation of knowing something they shouldn't know, but their ass is covered so they move forward anyway, knowing full well something is wrong.

If there was in fact a golden halo around ratings agencies, then who packaged the loans? They had to know the math behind what was in them. Someone knew. Someone is responsible for fraud, or whatever legal characterization makes sense. It's impossibly naive to believe it was all based on happenstance, and that all the actors involved were being ethical. Somehow they packaged the shitbird together, and pop! Out comes a AAA rating? And then that happens over and over again? It borders on absurd, and my money is on them sitting around high-fiving e/o.

This reads as being from someone who has never valued or modeled a CLO. 

 

Certain key assumptions need to be made at some point, generally by looking at historical numbers. 

 

A CLO can be filled with high risk mortgages, but if in the past default rates had never exceeded 10% on the these mortgages, the top Tranche of the CLO covering 60% of the mortgages and bundled with a CDS covering the first 20% of loss can easily be modeled to be AAA. After all you'd need 50%+ of the loans in the CLO to default before the owner faced any loss. 

 

The people are the ratings agencies were generally out of the loop as the quality of the underlying assets really deteriorated leading up to the crash. After all many homes are back to up their pre-crash levels, so for 95% of the mortgages issues the underwriting wasn't so bad. 

 

You can say I'm calling this "happenstance", but there are technical reasons that the extent to which things could go wrong were not accounted for in the models. Similarly one can imagine in calculating municipal finance models for Flint, Michigan 20 years ago no one modeled led poisoning in, since it had not happened before. 

 

This isn't exonerating them, after all it was their main job to rate these securities, but I think you're fitting everything into a convinent but factually incorrect narrative. 

 

Quote:
 Right, so this speaks to my original points on the topic... how is it that all of this unethical/illegal business took place and nothing was done? In Iceland, for example, many bankers were sanctioned, criminally prosecuted, etc. They went to the guys that prosecuted the S&L scandals for help. A whole host of people sit/sat in a real jail cell. Somehow Iceland could muster the evidence to prosecute but the US couldn't? Smells a lot like Hillary and what she recently got away with. Rigged system.

Until the US stops this bullshit of fining banks and starts jailing individuals, this will continue.

Iceland is very different. Unsophisticated bankers essentially knowingly commited fraud by selling eachother assets at ever greater inflated values. One goes to jail for fraud, as a handful of Goldman traders did find out, but one doesn't go to jail for making mistakes. 

 

Otherwise we may as well just let populists run the financial system and go on witch hunts whenever they feel like it. Basel III has done an excellent job of patching up the issues in the 2008 crisis. Congress has went about and produced incredibly poorly written and confusing bills on the other hand.

 

Quote:
 Per above... another useless fine. I didn't read the book you mention, though I recall a guy getting pinned down pretty hard over it on CNBC about the BATS exchange's feed timing

Is it useless? After this all the exchanges provided detailed guides regarding their order types and an industry wide effort began to start to reduce the number of order types. 

 

The BATS CEO presented really badly on CNBC, but what I learned about HFT since that point explains that a lot of the accusations directed at his exchange were pretty easily disproveable hence his anger. 

 

Quote:
 It's the same math brains modelling the more complex aspects of HFT, so my point stands

The capital markets are arguably one of the greatest allocation tools for resources ever devised. I hardly see why people modeling the markets is a waste of talent or time. 

 

Quote:
 So I understand how derivatives are priced and what they mean as an asset class. Yes I was manipulative with the idea that these assets were worth more on paper than all the worlds assets combined, but it served to expose the point about the dangerous exponential nature of this stuff, and how quickly it can spiral. 1 becomes 2 becomes 4, 8, 16... 256... 524288... 4294967296...

It serves only to show that an exponential equation is an exponential equation. Multiplying the notional does not change the net. 

 

We did see havoc is possible, but that was much about a lack of rules keeping pace as much as anything else. Off Balance Sheet transactions without capital reserves was something that needed to be rained in.

 

Quote:
 Plenty is a relative term. I would consider it a very tiny few when you look at the larger landscape of people making up this industry

You misunderstand. Virtually ever analyst modeling MBS believed this could happen. The general belief though was it was isolated to a particular area. 

 

Quote:
 I wouldn't be surprised if what is happening off books inside HFs totals an order of magnitude more than what is on the books. Perhaps the bubble I mentioned is actually here

On/off book isn't related to HF since it is only public companies and banks that are publicly disclosing their books and had an incentive to boost their ratios. 

 

A lot of the rules related to how an HF have been funded have been tightened up to prevent banks getting backdoor involved and a lot more is now done through exchanges. A pop would only take out hedge funds and their investors rather than be a systematic market issue.

 

Quote:
 Asset mgt is not, but the 401k industry is the sub-industry I was talking about.

In this respect markets are starting to work, but most of the 401k plans out there are pure garbage, and I disagree that these high cost funds won't persist for a long time. And it only helps those getting on the ladder now anyway because the guy that started in 1980 has seen the impact of the fee machine.

It's exactly the point of the 1/2-2/3 profit loss to to demonstrate a lifetime's losses. The actors here understand completely the compound nature of their fee suck, why not show it to the public?

It is a fair point about the 1980's, but there were not cheaper alternatives available then I believe. Beats some of the old plans though that only allowed investment in the company's stock. 

 

It is the point, but it isn't realistic. At the same time I think we agree that the way these plans are handled is generally mismanaged. 

post #10024 of 11195
This is probably overly simplistic...

I notice folks like to think that if a portfolio contained some high risk mortgages it automatically should never be rated AAA but doesn't very basic portfolio theory demonstrate it's possible that a high risk addition to a portfolio can, in some cases, actually lower the overall risk of the portfolio?
post #10025 of 11195
Quote:
Originally Posted by Piobaire View Post

This is probably overly simplistic...

I notice folks like to think that if a portfolio contained some high risk mortgages it automatically should never be rated AAA but doesn't very basic portfolio theory demonstrate it's possible that a high risk addition to a portfolio can, in some cases, actually lower the overall risk of the portfolio?
I think that gets to one of the many difficulties here - the lack of consistency or clarity in how we use various terms. For someone's answer to your question to be meaningful, you'd both need to be using the same definition of "risk". Cash is generally considered "low risk" as an asset class because its nominal value is fixed (or if we're talking money market funds, say, the risk of breaking the buck, while not absolutely zero, is very low). But keeping your entire portfolio in cash obviously increases your exposure to things like inflation risk.
But generally yes, I think the general notion is that diversifying into other assets classes - even ones that carry higher absolute risk in the sense we tend tonuse it here - could potentially reduce the expected volatility and overall performance of the portfolio.
post #10026 of 11195
Quote:
Originally Posted by Piobaire View Post

This is probably overly simplistic...

I notice folks like to think that if a portfolio contained some high risk mortgages it automatically should never be rated AAA but doesn't very basic portfolio theory demonstrate it's possible that a high risk addition to a portfolio can, in some cases, actually lower the overall risk of the portfolio?

A high risk asset can never lower the overall total risk of the portfolio, but it could improve risk adjusted return. You can define risk as a total capital loss for the purpose of the instrament although obviously every investor may value a different set of risks. 

 

That said structured finance in particular aims to solve this problem. In a normal bond issue everyone sits and the same level and has default risk if the bond ever defaults.

 

Structured finance takes a riskier asset but parcels out the risk and reward to various investor classes. 

 

I can take a very low quality asset pool, say credit card debt past 90 days due with a credit score below 600, and create a CDO. Even if the average recovery rate is 50% and the worst case recovery rate is 20%, the top 10% of structure can still be AAA. The mezz debt of the structure (the bottom tranche) maybe CCC rated though even though it's the same asset.

 

Think of it like waiting in line with at a bank window and waiting for money that day to be delivered to the bank. You don't know exactly how much is coming, but you do know roughly how much the bank got yesterday. The only way to get in the line though is to a buy a spot. Obviously the guy at the front of the line will get his money (AAA), so that spot is the most expensive (i.e. pays the lowest yield, say 1%). The guy five spots back will probably get his money since yesterday the guy up to 10 spots back got his, although there was one time only three spots got their money (BBB+ 4%). The guy at the 11th spot may or may not get his money, but the odds look okay (CCC, 12%). The guy 25 spots back, well everyone thinks he is screwed (C, 85%).

 

So no reason that even for the crappiest of assets the top tranche can't be rated AAA. 

 

Think of 2008 and the ratings agencies like someone modeling the odds of getting your money in every permutation of the line, but missed that the bank hadn't upgraded its fire system since the 1900s and all the cubicles were actually filled with dry paper and avid smokers. In hindsight when the bank burns down before the first guy even gets his money everyone is like "duh", but most people didn't bother to factor that in before seeing it happen. 

post #10027 of 11195
Thanks for the easy to understand reply.
post #10028 of 11195
Quote:
Originally Posted by Piobaire View Post

Thanks for the easy to understand reply.

Finance is deceptively simple, but uses incredibly complicated words to scare everyone off so we can get paid more :). 

 

Jokes aside I used to teach both interns and incoming analysts at a structured finance hedge fund as a summer job. The analysts and associates always needed things explained more simply, ironically, and I became known for my long winded sometimes confusing and sometimes clarifying metaphors. 

post #10029 of 11195
Quote:
Originally Posted by MSchapiro View Post

This reads as being from someone who has never valued or modeled a CLO. 

Certain key assumptions need to be made at some point, generally by looking at historical numbers. 

A CLO can be filled with high risk mortgages, but if in the past default rates had never exceeded 10% on the these mortgages, the top Tranche of the CLO covering 60% of the mortgages and bundled with a CDS covering the first 20% of loss can easily be modeled to be AAA. After all you'd need 50%+ of the loans in the CLO to default before the owner faced any loss. 

The people are the ratings agencies were generally out of the loop as the quality of the underlying assets really deteriorated leading up to the crash. After all many homes are back to up their pre-crash levels, so for 95% of the mortgages issues the underwriting wasn't so bad. 

You can say I'm calling this "happenstance", but there are technical reasons that the extent to which things could go wrong were not accounted for in the models. Similarly one can imagine in calculating municipal finance models for Flint, Michigan 20 years ago no one modeled led poisoning in, since it had not happened before. 

This isn't exonerating them, after all it was their main job to rate these securities, but I think you're fitting everything into a convinent but factually incorrect narrative. 

Iceland is very different. Unsophisticated bankers essentially knowingly commited fraud by selling eachother assets at ever greater inflated values. One goes to jail for fraud, as a handful of Goldman traders did find out, but one doesn't go to jail for making mistakes. 

Otherwise we may as well just let populists run the financial system and go on witch hunts whenever they feel like it. Basel III has done an excellent job of patching up the issues in the 2008 crisis. Congress has went about and produced incredibly poorly written and confusing bills on the other hand.

Is it useless? After this all the exchanges provided detailed guides regarding their order types and an industry wide effort began to start to reduce the number of order types. 

The BATS CEO presented really badly on CNBC, but what I learned about HFT since that point explains that a lot of the accusations directed at his exchange were pretty easily disproveable hence his anger. 

The capital markets are arguably one of the greatest allocation tools for resources ever devised. I hardly see why people modeling the markets is a waste of talent or time. 

It serves only to show that an exponential equation is an exponential equation. Multiplying the notional does not change the net. 

We did see havoc is possible, but that was much about a lack of rules keeping pace as much as anything else. Off Balance Sheet transactions without capital reserves was something that needed to be rained in.

You misunderstand. Virtually ever analyst modeling MBS believed this could happen. The general belief though was it was isolated to a particular area. 

On/off book isn't related to HF since it is only public companies and banks that are publicly disclosing their books and had an incentive to boost their ratios. 

A lot of the rules related to how an HF have been funded have been tightened up to prevent banks getting backdoor involved and a lot more is now done through exchanges. A pop would only take out hedge funds and their investors rather than be a systematic market issue.

It is a fair point about the 1980's, but there were not cheaper alternatives available then I believe. Beats some of the old plans though that only allowed investment in the company's stock. 

It is the point, but it isn't realistic. At the same time I think we agree that the way these plans are handled is generally mismanaged. 

Of all the academic disciplines, math was always my strongest. I didn't quite have that last 1% to be a physicist, at least the type that could really break some ground. I ended up as an engineer. I have some physicist friends, and I enjoy the opportunities I get to bounce my latest understandings of M theory and S-matrix against their institutional knowledge. One friend is a physicist, but has never used it. After his Princeton PHD, he created a hedge fund. I particularly like talking to him about how the two converge. His views on HFT are more sinister than yours, but I suppose he has to model/fight their market influences. And I love how Einstein was an outsider.

I've opened by mentioning this because while I'm not a physicist, nor a financial analyst, I have a passion for both fields and like getting a change to to bounce my latest (layman) understandings against finance's institutional community viewpoint (like you). I have some finance friends, but they all seem to try and angle me towards investing with them, heh.

I'm going to be proactive and wind this down since I don't want to abuse your time. I do want to make a few final comments, and many will likely remain contrarian, it represents that outsiders are often wrong but sometimes correct because insiders can often wear blinders or be burdened by self interest. Otherwise I share your views.

I have never modeled a CLO, and value is subjective. CLOs are packaged to reflect an understood body of risk among members of a community. If I get a CC at 22%, I will balk, I am not that high risk. 8%, I'm more amenable because the complex set of risk factors match my subjective value... I'm 99.9% likely to pay, but the bank has a set of costs to cover, so the loan is worth that 8% with that set of factors in mind, just like a CLO is created, then rated. While it's component parts are not 99.9% likely to pay, they do cross a threshold that makes them AAA. Monkeying around that threshold was worth quite a few millions, so it was vulnerable. I happen to stand by my view it was fraud in this case because my spidey-sense says that enough people understand this space intimately enough to value it correctly. They didn't, and 'out of the loop' seems too convenient.

Models are impossible to assess extremes from (meteor strike?)... but ask yourself, in the mortgage meltdown, what were these extremes? I can think of 6 or 7, of which none were really extreme, just unlikely, all modelable. Take for example no doc loans, in what universe do you loan money to someone based on unchecked data? Were no doc loans a phantom to the sphere of influence that surrounded all the actors in the meltdown? I'm going to LOL if you say no. More likely, almost everyone knew. And somehow this wasn't modeled? To me, it seems the biggest factor in the meltdown, yet everyone is this stupid? I am a strong believer in our low IQ society, but not that dumb at those income levels. Ask me if a bunch of Wendy's workers would notice tainted meat, ha, no... but what if they were epidemiologists? Frown.

So it's not an inconvenient narrative, it's just a bunch of shitty people thinking they would never be exposed because housing was 'solid'. And these shits are still there, leading to the next summarization.

Iceland... I find it quaint, if not camp that you think their bankers were blatantly doing illegality, yet US bankers were not. In what universe do the same set of circumstances that melt down a system rely on two completely different sets of circumstances to reach the same end? If US bankers were so upstanding our market would have been fine, yet these Icelandic fucks were out shilling the shit American bankers were creating? It's as if they were selling the shit from our toilet by filtering it just before it reached the sewer, and because of that tiny nuance they were criminals. Seriously, come on.

Our system colluded. Blankfein's testimony was surreal, as was that idiot Lynch's the other day. How many times do you let these motherfuckers play word salad to the point that language ceases to be a useful tool for communication? You must be in a separate universe to believe Blankfein's explanation that the asset buyer was sophisticated enough to partake... meaning Sam Superdad's 83 yo 401k administrator's purchase of some fund that was dealing with 40 obscure vehicles he was promised were 'AAA' were in fact shit, an old man was not lied to. I get it... because it's Iceland, it's unsophisticated.

BATS CEO? I can explain an anomaly in an oscillator with my eyes closed even though I haven't dealt with it in 20 years. This guy couldn't explain why his data feed was off? He's incompetent or lying. I bet lying.

Regarding the 80s, it was a system based on limited data, where unlimited data was in the hands of a small minority. Start to sound familiar? Suddenly people start to fuck over other people for their own self interest. But somehow because we have more data in 2016 this is dead? And these same actors keep using more and more complex language to mask the same garbage. HFT, these highly abstract derivatives, and countless other vehicles have replaced the early Talbott tie wearing blackslappers with a bunch of math quants and fancy language to mask the continued intent to fuck the dumb money. If we are better off than '82, its not by anything close to what we're told we are.

Go around pretending all these gaps have been closed, or that these systems are better than 1982. I don't buy it, they are just more evolved to cope with the scrutiny. In the 80s Miami drug dealers were buying waterfront houses cash, but they got smart, and suddenly all these obscure shell corporations started building these huge buildings allover with the same money, just replace the backslapping with a bunch of attorneys and accountants. Trade those for quants and we have the same shit.

My cynical world view is informed by thousands of years of history that show the same pattern, well before Tulipmania to well after '08 into the future. You may have a deeper institutional understanding, but your industry won't ever have my confidence, something you need in large numbers to maintain the status quo.
post #10030 of 11195
TL;DNR.
post #10031 of 11195
VIX skyrocketing to, um, 0.5% below where it closed Friday.
post #10032 of 11195
My friends in the semiconductor industry were talking about the ARMH buzz after brexit. I brushed it off and look like a fool today. I guess next round of drinks is on them.
post #10033 of 11195
SVXY up around 40% since Brexit icon_gu_b_slayer[1].gif

Can probably ride this out til the December rate hike.
post #10034 of 11195
I asked before but crickets... anyone know SPI? They seem to jump around a lot. Small energy company, like 350M market cap. I have an alert around $5/share and just bought in a nice chunk today at $5.05-5.10 and will trim at $6.25 and sell at $8. Looking to double down too if it goes under $5 even a little.

I'm totally gambling but that's the game. This one seems to move a lot. I mean today it jumped around from $5 to $5.75, so a 15% movement in a single day and no news I can even tell.




GLF dropped to like $3.05 for a second on the opening today and even though I had buy orders they never filled. Maybe someone dumped a bunch? Came right back up to $3.3-3.4 within a few minutes.
post #10035 of 11195
Quote:
Originally Posted by dizzy View Post

SVXY up around 40% since Brexit icon_gu_b_slayer[1].gif

Can probably ride this out til the December rate hike.

Well that certainly puts my 15.3% YTD to shame. frown.gif
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