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Tahmid Rouf

Hedge Funds, Historians Are Winners of Recession: Matthew Lynn - Bloomberg - 0 views

www.bloomberg.com/...news

financial crisis

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • That’s it, then. The global recession is over. At least that’s what Federal Reserve Chairman Ben Bernanke says.
  • And yet the biggest shock to the global financial system since the 1930s won’t just leave us with a legacy of lost output and higher unemployment. The recession will reshape the way we think about the economy for a generation.
  • So who are the winners and losers from the recession? Here are five places to start: Historians have triumphed over economists; hedge funds over bankers; Germany over Britain; the right over the left; and the frugal over the spendthrift.
  • ...7 more annotations...
  • One: Historians won out over economists. No single group of professionals took a worse battering during the economic slump than economists. Not even bankers.
  • Two: Hedge funds over bankers. If Lehman Brothers Holdings Inc. had a dollar for every time someone warned that hedge funds would bring the financial system to its knees, the bank wouldn’t have gone bust. While hedge funds took plenty of criticism, and are still facing calls or more regulation, the simple fact remains that they didn’t blow up the way many predicted.
  • It was the mainstream banks that caused the crisis. That will influence regulators and investors for many years. Whatever people say now, it’s the banks that will face more scrutiny, not hedge funds. The result? The lightly regulated, cash-rich hedge funds will grow in importance, while the tightly controlled, capital- constrained banks stagnate.
  • Baseless Fears Three: Germany over Britain. For much of the past decade, the fast-growing U.K. was gaining on Germany for the role of Europe’s most influential nation. Almost 20 years after reunification, fears of a resurgent Germany turned out to be baseless. It was Britain, with its financial center, that was emerging as the leading European nation. The credit crunch will throw that into reverse.
  • Four: The right over the left. The credit crunch was probably the perfect moment for left-wing, anti-capitalist and anti-globalization movements to make their mark. After all, if this wasn’t a failure of capitalism, it is hard to imagine what might be. Vladimir Lenin would have led the overthrow of a dozen governments presented with an opportunity like this. But his heirs on the left failed to advance any cogent arguments. Nor did they develop any alternatives to free-market, finance-led capitalism. The plate was empty, but the anti-globalization movement failed to step up to it.
  • Five: Frugality over extravagance: The nub of the credit crunch was an attempt to load more and more debt onto people -- mainly in the U.S. and U.K. -- whose real wages were stagnant or growing very modestly. That will be thrown into reverse, and for the next decade, people will be paying down debt rather than accumulating it. House prices will be subdued as finance remains scarce, and household budgets will be tight. The result will be that companies will thrive if they offer value, drive down costs, and make themselves the lowest-cost supplier.
  • The Great Depression of the 1930s dominated the way people thought about the economy for the next 50 years. The great recession of 2008 and 2009 may not have such a long-lasting impact. But in those five ways, it will dominate policy for at least a decade.
  • Tahmid Rouf on 12 Jan 11
     
    A look back at the mess and what we can pick up from the ruins. I found this article to have good comedy value. However, it is very serious.
Tahmid Rouf

Truth and Lies about the Financial Crisis - a knol by Marc Samuel - 1 views

knol.google.com/...ies-about-the-financial-crisis

financial crisis economics hedge funds global recession

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • Because Hedge Funds' management are opaque, because they are located in Tax Havens, because the bonuses of their top managers are way above that of Goldman Sach's heads, they are regularly criticized by politicians, who perceived them as a threat to the financial stabilization
  • so the Hedge Fund Industry in general brought many suspicion with the current crisis; however, things are quite different now. Let's recall why:
  • When oil soared till mid-2008, many said hedge funds were speculating on a continuous rise with a 200 $ target for the barrel. But the rise of oil was led by simple supply & demand criteria, and the Hedge Funds had nothing to do with it.
  • ...13 more annotations...
  • The graph below shows the evolution of Hedge Fund indices recently, for each strategy used (Equity Market Neutral, Convertible Arbitrage, Event Driven, Macro & Equity Hedge); it proves that Hedge Funds suffered the crisis (because of spreads widenings and liquidity contraction).
  • One common argument you may hear is that traders' desire to get big bonuses led them to take too many risks, which ended up in the crisis; this is completely false
  • Actually, a good trader is an efficient risk-manager, and not a speculator. Inside a trader's book, there are - sometime complex - financial instruments that carry some risks (rate risk, credit risk, forex risk....), and the trader's job consists in managing those risks to hedge his book.
  • This is a touchy part that deserves a clear explanation; when American banks started to lend money to individuals who didn't meet underwriting guidelines, they didn't keep these loans in their balance sheet, using a sophisticated financial technique called securitization: described simply, a bank create a pool of the mortgages embedded in its balance sheet and produce a financial security (called ABS, "asset-backed security")  which is in turn sold to investors, and freely negotiated on capital markets.
  • Once those mortgages were packaged in MBS (for "Mortgage-Backed Securities"), they were traded on capital markets, either directly or through tranches of CDO (for "collateralized-debt obligations"); those products were supposed to offer a very interesting risk-reward profile, so many investors and banks buy those products throughout the World, and consequently regional banks in Germany, Scandinavia turned out to have subprime mortgages in their balance sheets; they were exposed to the US Real Estate market.
  • The conclusion is that banks' balance sheets and assets are so much intertwined that flaws in securities built on American Mortgages impacted banks in the entire World; an interesting thing to underline is that bankers faced fierce criticism for creating sophisticated derivatives products, but no one ever thought of asking to treasurers in smaller banks and financial institutions why they bought those complicated products.
  • And as one can see, every financial crisis that occured during the past thirty years had nothing to do with structured products and/or derivatives; the subprime crisis of 2007-2008 had one simple reason: the end of the rise of the Real Estate Market in the US, that is shown on the graph below:
  • Since the mortgages lent to American borrowers were based on the value of their houses, and not on their own wealth, things started deteriorating when the Real Estate market stopped rising. Obviously, US bankers that recommanded those mortgages were not absolutely honest...
  • Some pointed at the Rating Agencies (Moody's, S&P, Fitch) for they role in the crisis; but not enough, to my mind... and even if more regulation is being discussed at the time, one could wander if strong decisions will be taken in the end.
  • A Rating Agency assesses the credit worthiness of a firm which issues bonds; this credit worthiness is symbolized by letters, from AAA (the company has very little chance of defaulting) to C or D (the company has defaulted or is close to default); surprisingly, and though many banks fiercly compete with each others to get customers, rating agencies almost form a monopoly: only three major rating agencies exist, two of them acting as leaders on the market (Fitch is a little less active).
  • The way they work carries some conflict of interest; the firm who want to have its debt ranked has to pay the agency, which in turn must be as objective as possible when assessing the firm...
  • The Rating Agencies not only rated debts issued by companies, but also the famous Asset Backed Securities, Mortgage Backed Securtities and CDOs discussed above; many of those products got a very good grade, mostly AAA, though it appeared that the risks embedded in those products were largely undervalued.
  • As a matter of fact, the issue with the subprime crisis was that no one was fully aware of where lied the risks, no that there was too much risk.... the difference is important.
  • Tahmid Rouf on 12 Jan 11
     
    Very opinionated piece backed up by some facts. 
Tahmid Rouf

Majority of hedge funds say '08 U.S. recession likely | Reuters - 1 views

www.reuters.com/...idUSN2545697020070925

financial crisis economics hedge funds crisis

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • A majority of hedge fund managers say a U.S. recession is "very likely" in 2008
  • More than 61 percent of those polled said they believed a recession was "very likely" in 2008, the survey found.
  • "Respondents seem undaunted by prospects for a recession in 2008," said Howard Altman, co-managing principal at Rothstein Kass. "While over 43 percent will likely change their fund's particular investments, fewer than 15 percent anticipated changes to the fund's underlying investment strategy."
  • Tahmid Rouf on 12 Jan 11
     
    I don't think anyone paid attention to this article when it was originally released...
Tahmid Rouf

The financial crisis for dummies: Why Canada is immune from a U.S.-style mortgage meltd... - 0 views

network.nationalpost.com/...mortgage-meltdown-kind-of.aspx

financial crisis economics canada

shared by Tahmid Rouf on 12 Jan 11 - No Cached
  • very reassuring Sept. 25 report from Scotiabank that explains, quite persuasively, why Canada isn't going to suffer the same sort of subprime-mortgage-fueled financial-market meltdown that's wreaked so much havoc in the United States.
  • In Canada, household liabilities as a percentage of assets sits at 20% — close to the stable, sustainable level it's been at since the late 1980s.
  • Canada's subprime mortgage market (to the extent the bottom end of our mortgage market can even be called "subprime" in the American sense) represents only about one in every 20 mortgages.
  • ...7 more annotations...
  • In the United States, homeowners' net equity as a percentage of home value has plummeted from around 65% to 45% over the last two decades. with more than half that drop coming since 2000. In Canada, on the other hand, this ratio has remained stable at between 65% and 70% since the 1980s.
  • Less off-balance-sheet mortgages. The frenzy of mortgage securitization that gripped the United States in recent years (famously explained/satirized in this comic strip) never really took off here. According to Scotiabank "The majority of mortgages are held on balance sheet in Canada, with only 24% having been securitized." That's huge, because it is the radioactive quality of these securities — many of which contain a tangled welter of mortgages of varying quality — that has really sunk the U.S. credit market: Since no one knows how much these complex instruments are really worth, they still haven't established an equilibrium price level, thereby freezing the credit market for any entity that has a large number of them on their books. (What's more, even those 24% have mostly been securitized through the CMHC, a Crown corp. with government backing.)
  • Finally, there is the fact that Canada simply has a different — and more prudent — banking culture:
  • Canada banks continue to apply prudent underwriting standards. In other words, they have always checked, and continue to check, incomes, verify job status, asks for sales contracts, etc.,
  • On average, Canadian home prices are roughly 200% what they were in 1989. In the United States, the corresponding ratio peaked at 260% before crashing down to 220%.
  • This is the most shocking stat of all. In the United States, a full 4.5% of mortgages are in 90-day arrears (i.e. the local sheriff is ready to move in and tack a notice to the door). In Canada, the figure is one 20th that level — just 0.27%.
  • All in all, what do these figures show? A prudent, risk-averse, well-regulated Canadian real estate and mortgage community that — on both the seller, mortgagor and buyer sides — has avoided the pitfalls swallowing up the United states.
  • Tahmid Rouf on 12 Jan 11
     
    Very interesting. Highlights the main aspects that may have prevented us from being hit as hard as the States. It is important to note that our financial system is different in many aspects from the one in the states that triggered the recession.  This should be helpful for the housing/home-buyer people.
Tahmid Rouf

Investopedia.com - Your Source For Investing Education - 0 views

www.investopedia.com

financial crisis

shared by Tahmid Rouf on 12 Jan 11 - Cached
  • Tahmid Rouf on 12 Jan 11
     
    This is heaven if you are looking for investment related business terminology and knowledge. 
Ms Cuttle

Definitions - 98 views

financial crisis definitions
started by Ms Cuttle on 12 Dec 10 no follow-up yet
  • Tahmid Rouf
    #20 Tahmid Rouf on 12 Jan 11
     
    Here are some terms that I stumbled upon that may pertain to your part. Otherwise, it might just help to know.

    Short-selling: Basically, the stocks business on credit, selling of stocks you don't actually own while expecting the prices to lower in the near future, so you can pay back the stocks you borrowed by buying them when the prices are lower. So, to recap you borrow stocks and sell them to get your cash and you pay back the stocks you borrowed when the prices drop. You just sold high and bought low (to return what you sold). The difference is your profit. If the stock prices go up you make a loss, ironically. Well, at least this is the gist of the technique which made some people billions.

    Super simplified and condensed version of http://www.investopedia.com/university/shortselling/shortselling1.asp

    Sub-prime mortgage: Loans to people with terrible credit ratings who wanted a house, high interest rates were charged to offset the risk of lending to people you shouldn't expect your money back from. Also, to "reduce risk" and "increase profits" the geniuses at your local investment bank set the home as collateral, meaning if the borrower couldn't pay back the loan whoever issued the mortgage takes the house. So, the banks ended up with lots of homes in their pockets, soon there was no one to actually buy these homes anymore as everyone decided to wake up. There was mass meeting held by the home owner's union to decide that homes were overpriced and not worth it (this might be fabricated...), the banks ended up with a bunch of worthless houses. The rest of the story is too sad to continue...

    Also, on the same note.

    Foreclosures: Join the dark side, we have houses. This is when the mortgage lender seizes your house since you cannot make the monthly mortgage payment. A common sight in the States after the issuing of sub-prime mortgages.

    Super simplified and condensed version of http://www.investopedia.com/ask/answers/07/subprime-mortgage.asp

    Hedge Fund: Secret select few elites, kind of the like the Illuminati, decide to put in a huge pool of money to be managed and invested aggressively. They make high risk investments using intense too-high-for-the-average investor level techniques such as leveraged, short, long and market derivative in order to generate returns. The other technique not mentioned here is the amazing "guessing powers" of these elites. The intense too-high-for-average techniques sometimes backfire and hedgies end up losing value, however when they do succeed the return and can be enormous with three digit percentages.

    Thank you to http://www.investopedia.com/terms/h/hedgefund.asp for the long definition.
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