Wednesday, April 15, 2009

What Needs To Happen Now.

UBS is forecasting a much deeper loss of $1.75 Billion and they are cutting almost 11% of its workforce (Probably not the ones responsible for the Billions in losses). The bank said its net loss for the first three months was caused by roughly 3.9 billion Francs in losses on illiquid securities, expenses for credit losses, and lower value of assets on the remaining positions transferred to the Swiss National Bank as part of a government shore-up.

These type of announcements are going to be the norm going forward. We will find out that so-called positive announcements from the likes of GS and WFC are in the minority.

The financials paired back some gains yesterday on the backs of the Goldman earnings announcement. So far today, they look down as well.

The market currently is made up of two various differing opinions on the state of the financials. The reason I am stressing the financials, is that this economy and stock market is going no where with out a valid plan to fix the fundamental problem that is facing the banks....Which is INSOLVENCY.

So far the only response that the Obama Administration has given is just throwing taxpayer money at the dartboard, hoping one of these trillion dollar outlays hits bulls eye. Is this any different then the Bush Administration Model of saying "If lower taxes don't fix the problem, heck...then I am out of ideas"? The Obama/Geithner stance of transferring money from tax payers to the banks has set the most ludicrous and dangerous precedent in the history of our country. There! I said it. At least Bush had a valid excuse (9/11) to go to war with the Muslim world, what will Obama's excuse be when the latest round of subsidies fail? Sorry Barack/ cant blame Bin-Laden, terrorism, and Islam this time. The terrorists didn't invent Credit Default Swaps, if they would have known, they would have, and spared all of those Innocent lives lost on that day. You only have to look at Geithner's inner circle to find who the real culprits are.

If I sound emotional and angry, guess what! I am! Its totally frustrating and makes me angry when everything that the government has done has failed, and failed miserably so far. What I have seen is total outright fraud being committed by the financials with little or no response from the government. Do we have to go into AIG paying Goldman and Society General (Foreign Entity) taxpayer money for no good reason. Wall Street was given tremendous power and influence, and they failed us miserably because at the end of the day, Wall Street and the entire financial system is rotten to the core, and government wants the rotten system to fix itself? My dad was right when he told me "The More you know...The More Angry you will get"

The Obama Administration has no clue where the financial markets are headed, they have no idea other than subsidizing losses to find a solution. If you cant find the iceberg, you cant see disaster coming. If you see the iceberg, and don't get out of the way, because you think people are conscientious, then you are truly stupid. After stupid behavior is subsidized on the backs of everyday citizens, what makes it possible for financials to continue on with the shenanigans? You cant allow the same people who steered us into the iceberg, to now call the shots on how to get more lifeboats onto the ship. The taxpayer is not here to make the investment bankers and executives more wealthy. The bank executives are clueless, and the Obama Administration is in denial over the fact that the entire financial system needs a major structural revamping. At this moment Obama has lost my vote in 2012...regardless of who runs against him.

Everything that has been done has NOT made the markets stable in any fashion. The markets may have bounced recently, but don't be fooled. The financials and broader markets are no less fragile then they were 2-3 weeks or even 6 months ago. The basic principle that is lost to the people in power is that COMPLEXITY and a hatred for RISK CONTROL are what ruined the system, not securitiuzation or leverage. Sure these things had a hand in it, but it was the overall complex nature of structured products that doomed the market. So far the Obama Administration has done nothing to curb the appetite of structured product development. They have just enabled the enablers to continue to create complex derivatives products that very few understand. The more pressing need is to get things back in equilibrium. Currently we are trying to patch together bad banks and good banks, but the whole structure and flow of credit is out of whack. Equity investments are not accommodative to debt investments. Private equity and hedge funds don't have the will to invest after the Madoff event. Nothing is lining up properly, because the basic issues are not being focused on.

So how do we try and fix the system without wasting anymore money? Don't laugh...I am deadly serious. Here we go:

1- Eliminate margin trading except for primary dealers/market makers. Individual investors only get into trouble when they trade on margin. Most people have no clue about margin. The way I look at it is this way. If the experts failed so badly with margin/leverage...what do you think happened to the guy trading in his shorts in his garage?

2-Reduce or outright eliminate the dependence of "Complex Derivatives/Structured Products". Few people understand them, as they are too complex and far too volatile to price/trade. Why do we need 2x/3x Short ETF's? Why the need for CDS? The only reason these products are around is to make investment bankers rich.

3- Don't eliminate leverage and or securitiuzation, but make the assets within them more difficult to package, only the highest rated debt can be eligible to package.

4- Throw VAR (Value At Risk) Model out the window. We all know it doesn't work, if it did, we would not be in this mess. Its incredible that everyone still uses this crap model. After all of the de leveraging that has happened, all of the risk that has curbed, these models still don't seem to get it right. They failed with regards to LTCM in 1998...why would they not fail 10 years later.

5-Totally revamp and marginalize MBA Programs. They suck!

6-Eliminate the Nobel Prize for Economics. This is a total joke. Wall Street got off on these guys, entrusting them with trillions based on their flawed models. Merton Miller, Fisher Black, Markovitz, and Sharpe all should hang themselves, if they are all ready not dead.

7- Minimize the importance and scope of regulators. heard me. That is correct. Most regulators and compliance personal are fundamentally morons and idiots. They are easily convinced, and traders will always find a way to side step them at any given time. The regulators actually encourage people to take on more risk, over there lack of intelligence. Look at this way, the bond ratings agencies were able to rate everything AAA, because they took their Que from the regulators who told them their analysis was correct. VAR Models have been widely followed and implemented because the regulators tested them in normal times, and they worked, look what happened to the bond insures and the people who followed VAR since.

All of the above ideas stated above just simplifies the system. The system is too complex.
Leverage is only good and useful in a non-complex financial system. Leverage has become a bad word in many circles, but the complexity of financial instruments, and the lack of knowledge by the people who created them from flawed models is the real culprit.

Simplicity is the only way to get things back in equilibrium.


  1. I like the part about The Nobel Prize. That is truly a joke..good point there.

  2. Ha..Black/Scholes/Mont Carlo Sim/Binomial Pricing Models are all severely flawed, but yet Wall Street follows them. They are not accurate 60% of the time. The only model that common sense. VAR is probably the worst risk modeling application and most destructive to credit markets around the world, but moving away from it leaves thousands of workers on Wall Street out on the Street. Kick them to the curb....I say