tag:blogger.com,1999:blog-14963913.post8684717444008845236..comments2023-10-27T20:27:57.900-04:00Comments on Kid Dynamite's World: Big Bank Perfect Trading Quarters - The Real StoryKid Dynamitehttp://www.blogger.com/profile/17475987512856310577noreply@blogger.comBlogger51125tag:blogger.com,1999:blog-14963913.post-2073715428056551842010-06-21T10:02:07.407-04:002010-06-21T10:02:07.407-04:00Focus here seems to be on banks, and yes banks gen...Focus here seems to be on banks, and yes banks generally want to pay fixed and receive float as they need to shorten assets to match with their short and quickly repricing deposit liabilities. Other types of institutions have the exact opposite problem. For example, life insurance companies and pension funds have very long liabilities so they need to swap in longer assets. So you can see they are natural receivers of fixed and natural payers of float.Howard Lothrophttp://www.echopartners.comnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-61316910965846390662010-05-29T21:19:02.459-04:002010-05-29T21:19:02.459-04:00So many people have it backwards in thinking that ...So many people have it backwards in thinking that politicians are the ones in control, when in fact they are puppets controlled by Big Banking. The job of politicians (according to Big Banking) is to accept million$ in lobbyist bribes in exchange for billion$ worth of contracts, favors, subsidies, bailouts, banker-friendly laws, convenient loopholes, and lax enforcement of regulations.<br />It's the same story around the world: governments are now controlled by the Financial Industry, and there's nothing you and I can do to stop it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-77483772285778488052010-05-18T16:15:28.191-04:002010-05-18T16:15:28.191-04:00KD, I'm with you: highly skeptical of the prop...KD, I'm with you: highly skeptical of the proposition that banks can actually hedge their interest rate risk, other than by buying politicians to produce the desired interest rate policy and bailouts of insolvent institutions. In order to hedge the massive amount of interest rate risk in a system with so much short-term funding and long-term fixed-rate debt, you need to find someone in the system who is willing to pay floating rates. "Someone" usually is:<br /><br />1. An idiot (see muni issuers, people who take floating rate mortgages to save tiny amounts).<br /><br />2. A fiduciary paying himself a fat salary every week while exposing his idiot clients to interest rate risk that hasn't reared its head in 30 years and therefore is ignored.<br /><br />3. Someone greedy who wants a free lunch and thinks he can trade fast enough not to be a bagholder (many of these people are wrong).<br /><br />All of the big players in our economy claim to hedge interest rate risk. Are categories 1-3 above going to be able to pay them what they owe in a rising rate environment? At the start of the crisis we were worried about ARMs, but actually anyone who took an ARM with reasonable terms (fair spread to LIBOR/short-term Treasuries/bank funding costs) has done fine so far. If the Fed ever takes away the punchbowl and it's no longer possible to get a 4-5%mortgage, are ARM borrowers going to be able to pay their mortgages? Are pension funds and muni issuers going to raise taxes/contributions in order to pay out on swaps to big banks?<br /><br />At the same time, the interest rate carry trade is really, really profitable for now and the Fed shows no real signs of taking it apart. Look at how much money agency mortgage REITs (AGNC, NLY) have been making on exactly the carry trade you describe, even with much higher funding costs than TBTF banks. 15-20% ROE with no credit risk and a very simple strategy. I think it's very smart to short the low-quality banks with lots of credit risk and dubiously hedged interest rate risk (especially regionals and internationals), but the costs of doing so are very high and you have no idea if governments are ever going to get tough. As a result, I think any short positions in financials ought to be funded with long positions in TBTF institutions or the carry trade. In a long/short option book you can also profit off an increase in volatility.najdorfnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-41549252330497645312010-05-15T16:00:05.851-04:002010-05-15T16:00:05.851-04:00Kid, 5c/share was just a random number. People may...Kid, 5c/share was just a random number. People may not pay that kind of commission to their stockbroker any more, but they do routinely pay bid/ask spreads like that to fixed income market makers (5c on a $50 share is 10bp -- pretty standard for a 10y interest rate swap or a commodity derivative).<br /><br />I don't know what the commission number exactly counts, but I'm assuming it probably doesn't include bid/ask spreads on OTC equity derivatives. Even taking that number for what its worth, its $15mm/day in commissions, and equities is what, like 25% of GS trading revenues? So that's $60mm/day in commission or commission equivalents (they aren't strictly commissions in the fixed income world) -- lots of cushion to blow through before you have a loss-making day.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-57925811904561192102010-05-15T08:39:49.788-04:002010-05-15T08:39:49.788-04:00oh quantplus... i blog "for a living" be...oh quantplus... i blog "for a living" because i already made my money TRADING for a living...<br /><br />you can list all the ways you get out-traded on a daily basis, but what it means is that you have inferior technology, technique and access, not that you're being "cheated"<br /><br />and yet - that's all irrelevant - again. the entire point of this post is that you can shut down the equity markets entirely, and the big banks will STILL earn $100mm a day. <br /><br />never mind the fact that there is no defense of anything in this post, other than a goal to put the focus on the real issues, and not the ones the media gets ignorant bystanders all fired up about.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-23337359741396307632010-05-15T07:22:35.370-04:002010-05-15T07:22:35.370-04:00Jon Stewart chimes in
http://www.thedailyshow.com...Jon Stewart chimes in<br /><br />http://www.thedailyshow.com/watch/thu-may-13-2010/hoardersAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-63518216831501610072010-05-14T23:50:46.194-04:002010-05-14T23:50:46.194-04:00No offense, KD, but you obviously do not trade for...No offense, KD, but you obviously do not trade for a living. You blog. Out of 500 trades/day in listed stocks... I probably get cheated one way or another 100 times/day. It's always some form of "backing away"... either the Bot move the price by a penny denying me a fill... or the Bot short-changes me on size... giving me 100 shares instead of 500 or whatever. It's all a spoof to get me to pay more... but I just buy something else.<br /><br />10 years ago this kind of behavior was illegal and extremely rare. Your broker had an audit trail and you could often get justice with a phone call. Today the laws are the same... but are openly ignored and no one cares.<br /><br />It's as if you walked into Walmart or 7-11 and they tried to short-change you by one dollar... every single time. That level of petty crime. <br /><br />Your defense of what is de facto organized crime by the Securities Industry is ill advised. Defending all manner of Bot Spoofing as OK... because it's only 20% of revenues or whatever is no defense at all.QuantPlusnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-64431969740240171262010-05-14T21:57:32.617-04:002010-05-14T21:57:32.617-04:00anon, there's no tin foil hat stuff here at al...anon, there's no tin foil hat stuff here at all. if you know anything about the business at all, you'll know that banks can't do $100mm a day in commissions (or bid/ask market making), even globally across all products.<br /><br />GS even gave you the equity commissions: $881MM...<br /><br />ps - no one pays 5c a share anymore.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-67253400874235748042010-05-14T21:17:33.978-04:002010-05-14T21:17:33.978-04:00There's a much simpler, non-tinfoil-hat explan...There's a much simpler, non-tinfoil-hat explanation -- maybe the banks have scaled down prop trading and have more customer flow. Would you be surprised to learn that your stockbroker made money every single day of the last quarter, if he charges you 5c/share on every trade?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-85129625813399298452010-05-14T17:18:06.784-04:002010-05-14T17:18:06.784-04:00MR - what you're saying is interesting, but th...MR - what you're saying is interesting, but the various fixed income product desks run by various traders are not hedging all their rate exposure. Holding inventory helps the customer business. If the spread was not positive, it might be minimized. But the spread is positive, so it is maximized. You would be long as much as you can stand such that you don't get killed if rates back up. Nothing prevents this from being wound down before quarter-end, and then built back up. And nothing prevents top management at BAC from saying what people want to hear (we are hedged homie!)while their traders try to make some dough. Say you earn 250 over funding, long treasuries. For every $1B you are long Friday afternoon, you come in Monday up about $200K. Somebody has to own those securites. Makes sense it would be someone who can fund them at 25bps.oddlotnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-45157885285730760742010-05-14T16:09:59.544-04:002010-05-14T16:09:59.544-04:00MR - i hear you. the takeaway is that the carry t...MR - i hear you. the takeaway is that the carry trade attributed by the mainstream media is NOT what's happening.<br /><br />it's not that i disagree with you, it's that i'm saying there's no way that they're putting on a huge carry trade with a term mismatch and then hedging out the rate exposure (which defeats the main point of the carry trade). and i think you're saying the same thing.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-87254745075757842172010-05-14T16:05:11.048-04:002010-05-14T16:05:11.048-04:00Regarding proof that most of the interest rate ris...Regarding proof that most of the interest rate risk is hedged out, most banks don't give out detailed disclosures on this. But some do and the best out there is in the Bank of America investor presentations. Just take a look at slide 35 of this presentation here <a href="http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY1Mjg0fENoaWxkSUQ9MzU5ODE3fFR5cGU9MQ==&t=1" rel="nofollow">http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY1Mjg0fENoaWxkSUQ9MzU5ODE3fFR5cGU9MQ==&t=1 </a>. Apart from the direction of the interest rate exposure i.e. BAC makes money if rates go up and curve steepens (which is the exact opposite of what their exposure would be if they were borrowing short and lending long at a fixed rate), what's more relevant is how small the absolute risk is given the size of their balance sheet. Therefore if I assume that they're not lying, they're essentially more or less hedged.<br /><br />Regarding natural counterparties, there are two. The smaller one is corporates who want to swap their long-maturity fixed rate bond issuances into floating rates. The larger one which somehow never comes up in any discussion is the pension fund and life insurance industry who have a huge demand for long-dated assets to match their long tenor liabilities. Let me give you an example - in the UK, traditionally the curve has been inverted between the 10y and 30y just solely because of the demand from pension funds to buy 30y fixed rate assets (curve is no longer inverted given how low rates are now). There's not enough govt bond issuance in this sector so they need to create it synthetically via the swaps market.<br /><br />Just to clarify, I am not claiming that no banks play the carry trade, just that the big banks don't play it to anywhere near the extent the mainstream media likes to believe they do. This is primarily because they don't need to - the fact that they get funding from the central bank free of any credit cost means that they just need to find some "safe" asset with a small credit spread. The leverage they are afforded due to the TBTF guarantee means that even this small spread can be turned into a very attractive ROE.<br /><br />Anyway, there isn't much more evidence I can offer and if you're still not convinced, then we'll just have to agree to disagree!MRhttp://www.macroresilience.com/noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-35914413046404730582010-05-14T14:49:27.882-04:002010-05-14T14:49:27.882-04:00yes, anon - we all agree that there are potential ...yes, anon - we all agree that there are potential counterparties who might want the other side of this trade, but there is absolutely no way that the counterparties to this swap are naturally as big as the banks would need to be.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-54953073432897202112010-05-14T13:24:23.106-04:002010-05-14T13:24:23.106-04:00Who takes the other side of the swap? Some munis ...Who takes the other side of the swap? Some munis will take a swap where they are paid fixed but they pay floating.<br /><br />It would be interesting how many state and local issuers (whether municipal or quasi-municipal) have entered into unhedged swaps with the IBs thus transfering all of the risk.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-17928345221016917722010-05-14T10:20:12.274-04:002010-05-14T10:20:12.274-04:00"rule 1: there is no net hedging in the syste..."rule 1: there is no net hedging in the system"<br /><br />Yes, and that is the fallacy of too many of the arguments for the extensive array of derivatives that have been created and traded. The idea that all (or most) of the risk can be hedged away in the whole system is absurd. And so when it implodes it falls on govts to patch the sinking boat. <br /><br />Someday that will fail too; spectacularly. It's just horrifying to see us continue to build the house of cards (i.e. ponzi).Onlookerhttps://www.blogger.com/profile/07742157936955263465noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-57825939723971962022010-05-14T08:56:36.727-04:002010-05-14T08:56:36.727-04:00onlooker - of course there are natural counterpart...onlooker - of course there are natural counterparties to that swap, but, as you noted, not in the size that the big boys would have to do. <br /><br />as david Merkel on Aleph blog said : "rule 1: there is no net hedging in the system"<br /><br />http://alephblog.com/2010/03/06/the-rules-part-i/Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-16534963854990091792010-05-14T08:49:36.391-04:002010-05-14T08:49:36.391-04:00KD said:
"WHO WOULD BE ON THE OTHER SIDE OF T...KD said:<br />"WHO WOULD BE ON THE OTHER SIDE OF THAT TRADE?"<br /><br />I am but a layman in this area, and far from sophisticated in my knowledge of the minutia here, but that was also my thought on this.<br /><br />I realize that there could be some counterparties out there willing to do this kind of swap, for various reasons. But enough to take on all the interest rate exposure of all these big banks? I doesn't seem plausible, but I'm open to learning too. <br /><br />It does seem crazy for all these banks to take on this kind of interest rate exposure by doing the simple borrow short-buy long carry trade, but we've seen dumber things before. And they're desperate to recapitalize, and the Fed and Treasury are their willing accomplices.<br /><br />The fact that they haven't thought this out 5 moves ahead and are just hoping that it will somehow all work out wouldn't surprise me too terribly; unfortunately.Onlookerhttps://www.blogger.com/profile/07742157936955263465noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-52832393097059684552010-05-14T08:25:09.418-04:002010-05-14T08:25:09.418-04:00MR - yes - i understand that interest rate exposur...MR - yes - i understand that interest rate exposure can be hedged, but, well, there's no way that the banks can possibly be doing that: borrowing short, lending long, and swapping out their interest rate exposure. it's impossible - isn't it? for a simple reason: WHO WOULD BE ON THE OTHER SIDE OF THAT TRADE? someone has to take the other side of the swap! If all the big boys are the same way, there's no one to take that exposure from them. remember, Swap counterparties aren't just some magic blip on the screen - they are real institutions.<br /><br />and I think that your second point is precisely the problem, and it's exactly why the Fed's hands are tied: they cannot raise rates!<br /><br />that's why i wondered what the exit plan is, especially since the Fed is done with its MBS purchases...<br /><br />in short, i think that the carry trade is certainly part of the explanation, but that it's definitely NOT riskless, and that the interest rate exposure has not been hedged out. but if someone disagrees, i'm listening...Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-7142760463852490132010-05-14T03:17:35.167-04:002010-05-14T03:17:35.167-04:00What I'm saying is that if they do invest in 3...What I'm saying is that if they do invest in 30y treasuries after borrowing at 25 bps from the Fed, they then hedge the interest rate risk out by entering into a 30y fixed-floating swap where they pay 30y fixed and receive floating - thus removing the interest rate carry/risk component. <br /><br />So yes the TPC article like most others on this subject is wrong - if the above trade is not hedged with a swap, it is nothing like riskless. A small rise in rates will bankrupt the entire industry - in fact the Fed was able to do exactly that 50 yrs ago when banks primarily had fixed rate govt bonds and could not hedge. But none of this analysis incorporates the impact of hedging via swaps/options etc that almost any bank with an asset-liability management desk undertakes. <br /><br />The WFC quote you mention is on these lines and the only publicly available "proof" on this subject is in almost every BAC investor report which has the interest rate risk profile showing a positive sensitivity to interest rates, just like WFC claims and I suspect most banks are currently positioned similarly except maybe the smaller banks. Again its in the middle of this post <a href="http://www.macroresilience.com/2010/04/04/maturity-transformation-and-the-yield-curve/" rel="nofollow">http://www.macroresilience.com/2010/04/04/maturity-transformation-and-the-yield-curve/</a> .MRhttp://www.macroresilience.com/noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-58156225657230953152010-05-13T23:15:50.755-04:002010-05-13T23:15:50.755-04:00GYC - i read about that Dimon protest earlier. it ...GYC - i read about that Dimon protest earlier. it wasn't clear if they would have clothes under their robes...Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-88225141607775340062010-05-13T22:31:46.513-04:002010-05-13T22:31:46.513-04:00I think all the ladies should protest JPM and Dimo...I think all the ladies should protest JPM and Dimon by disrobing:<br />http://tinyurl.com/2bzpuz8<br /><br />I told you this would catch on!EconomicDisconnecthttps://www.blogger.com/profile/02802078645713106743noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-25835399343034331712010-05-13T21:43:30.833-04:002010-05-13T21:43:30.833-04:00yes HT - i think that's a very accurate descri...yes HT - i think that's a very accurate description of the problem. although you forgot about actual asset price support too - the Fed buying MBS, Treasuries, etc...<br /><br />In this post, my goal was to draw attention to the actual problem - which is the willful subsidies by the Fed and Treasury, and not necessarily to condemn the banks. It again comes back to the "don't hate the playa hate the game" analogy, and relates to my colleague who called me socialist: the FED is being socialist, the BANKS are being capitalists... I don't like it, but it's hard to fault them for that.<br /><br />summing up - yeah - my point wasn't that you should call Jamie Dimon at JPM and tell him how much he sucks - you should call your congressman and tell them what you think of the Fed's policies - but as you noted, we might not like the alternatives as much as we think we would! and thus the Law of Unintended Consequences arises again...Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-41120687593472473902010-05-13T21:19:08.090-04:002010-05-13T21:19:08.090-04:00Sorry KD, I know you're working hard to unders...Sorry KD, I know you're working hard to understand the mechanics of the situation here, but isn't the real problem the inappropriately low Fed interest rate, not the banks that are able to benefit from a unusually tilted FICC environment?<br /><br />And the low Fed interest rates are primarily due to the political desire to dampen the socio-economic impacts from many years of accumulated bad consumer borrowing behavior.<br /><br />And that Tim and Ben know this policy is just giving money to the banks, even if that may not their direct intent? They might even be as troubled about this as you are?<br /><br />But maybe they've played the scenarios and this is the best of the possible outcomes. That raising interest rates and increasing socio-economic stress at this moment would possibly result in public and congressional outrage directed at the Fed. That a congress that has not been strong in demonstrating its competency in understanding complexities of modern financial markets or macroeconomics may then take legistative action to cut back Fed independence and enact further restrictive policy measures on the US financial system. <br /><br />And this endgame may be more damaging to the US in the long run than allowing the dynamic that you're appropriatly critical of to just play out?<br /><br />The banks are capitalizing on an unusual situation, but one that is rooted in the American citizen that is still relatively ignorant of their own role in causing the economic environment thats been created, and still has not faced up to their own personal accountability in taking on the pain required to restore health to our financial system.HTnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-36639144546910662712010-05-13T21:10:24.858-04:002010-05-13T21:10:24.858-04:00Onlooker,
saw your comments over at PragCap. Good...Onlooker,<br />saw your comments over at PragCap. Good stuff.EconomicDisconnecthttps://www.blogger.com/profile/02802078645713106743noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-78996449376936595272010-05-13T20:57:10.160-04:002010-05-13T20:57:10.160-04:00KD
I should have known that you would be amongst ...KD<br /><br />I should have known that you would be amongst the few to get this story right. As I wrote in the comments over at PragCap earlier:<br /><br />I’ve really been confounded by the lack of any critical thinking and analysis regarding this latest revelations about the big banks’ “trading” success. I guess it’s just easier, and a lot more fun, to think that they have ultimate control over the stock market and can’t lose there. While the real truth continues to be that the fed govt and the Fed have rigged the whole market and economy to funnel easy money and profits to these banks; just as you point out.<br /><br />Don’t misunderstand me, believe me I’m outraged. But let’s be outraged at the proper thing. That we’ve bent over (or been bent over, is more like it) to bail out banks and their bondholders.Onlookerhttps://www.blogger.com/profile/07742157936955263465noreply@blogger.com