**** you, method of characteristics

[KrazyHorse]

How about we ban naked shorting too? Oh, wait...

[MRT144]

Customer/Client withholds payment/withdraws capital to increase the likelihood of default and purchases CDS.

Using CDS basis spread as a key metric of default likelihood encourages increased spread in basis, which triggers capital to leave which impairs the ability of the company to do business and increases the likelihood of default.

This simply doesn't make any sense.

It's not a problem that can be regulated nor should it be. Perception of spread being predictive of default can be self reinforcing but what can you do?

[MRT144]

Requiring that somebody own the underlying would be idiotic and demonstrates how ****ing little of this you understand. The WHOLE POINT of CDS is that it disaggregates default risk from other considerations, so that you can lay off GENERAL RISKS CORRELATED WITH THAT COMPANY'S DEFAULT. Requiring somebody to own the underlying in order to trade CDS is like requiring that somebody own the underlying to trade oil futures. It causes all sorts of transactions costs to appear.

What's wrong with having a vested interest in something to take a derivative contract on it other than it makes it more of a hassle for paper pushing investment banks to turn profit? Are most futures contracts done by businesses that are hedging for their underlying business or by prop desks at investment banks? Derivatives are a means not an end, or at least I think that should be the relationship.

How does it disaggregate the risk and to what level? How did the CDS on Lehman disaggregate risk to AIG, GS, DB, and the US taxpayer?

KH, is being an apologist for Goldman part of the testing for the interview at Goldman? Do you think that the status quo is fine and that JPM and GS are entitled to take whatever they can and there should be no impedement to that? You seem to be of the mind right now "What's good for Goldman is good for me, and good for America". Is there anything that can be better than it is now?

[KrazyHorse]

OMFG, you are a ****ing idiot. Here's ****ing day 1 of any finance course in the world:

The markets have a number of different types of active participants at a given time. There are three main divisions:

a) Arbitrageurs pick up free money. They take advantage of mispricings across markets. By doing so they provide a service to people who wish to purchase or sell in a given market and who are not being given the best possible price for their assets/goods etc.

b) Hedgers are attempting to reduce the overall risk exposure of an institution. If their company has uncomfortably high exposure to energy prices or to Japanese interest rates they go into the market and purchase insurance through whatever mechanisms are available to them. Risk is not a conserved quantity; it is possible for a contract to reduce the risk to both parties.

c) Speculators bet on the likelihood of price movements over time. If a speculator is successful he will be providing more accurate information to the marketplace as to the probable future cost of goods, assets, currencies etc. This more accurate information allows people to plan intertemporally more efficiently; a speculator's incentives are aligned firmly with the goal of providing more accurate forecasts. If speculators successfully predict that oil prices will go up then their activity causes oil prices to go up TODAY, and go up less TOMORROW than it would have otherwise, causing more exploration and more conservation of oil resources immediately in preparation for the future.

Which of these goals do you object to?

There are numerous sources of risk and uncertainty in the marketplace. Derivatives provide more handles on more specific aspects of this than would be available from simple ownership of underlyings. There is no reason to believe that forcing a DIRECT LINKAGE between financial activity and the real economy would at all be positive. Financial firms specialize in the activities mentioned above so that non-financial firms don't have to.

[MRT144]

OMFG, you are a ****ing idiot. Here's ****ing day 1 of any finance course in the world:

The markets have a number of different types of active participants at a given time. There are three main divisions:

a) Arbitrageurs pick up free money. They take advantage of mispricings in the market. By doing so they provide a service to people who wish to purchase or sell in a given market and who are not being given the best possible price for their assets/goods etc.

b) Hedgers are attempting to reduce the overall risk exposure of an institution. If their company has uncomfortably high exposure to energy prices or to Japanese interest rates they go into the market and purchase insurance through whatever mechanisms are available to them. Risk is not a conserved quantity; it is possible for a contract to reduce the risk to both parties.

c) Speculators bet on the likelihood of price movements over time. If a speculator is successful he will be providing more accurate information to the marketplace as to the probable future cost of goods, assets, currencies etc. This more accurate information allows people to plan intertemporally more efficiently; a speculator's incentives are aligned firmly with the goal of providing more accurate forecasts. If speculators successfully predict that oil prices will go up then their activity causes oil prices to go up TODAY, and go up less TOMORROW than it would have otherwise, causing more exploration and more conservation of oil resources immediately in preparation for the future.

Which of these goals do you object to?

There are numerous sources of risk and uncertainty in the marketplace. Derivatives provide more handles on more specific aspects of this than would be available from simple ownership of underlyings. There is no reason to believe that forcing a DIRECT LINKAGE between financial activity and the real economy would at all be positive. Financial firms specialize in the activities mentioned above so that non-financial firms don't have to.

A. is fine except when the ones participating in it are also collecting exchange rebates merely for participating.
B. is fine by me
C. is fine except for the issue of mania and herd chasing. The price of oil may go up more today because of speculator price prediction and but it may go up even further tomorrow as more people speculate and participate. Self reinforcing speculation increases volatility, and for some commodities has a clear deterious effect on people not participating in the speculation. Enforcing vested interest in the derivative may mitigate this to some degree.

And I'm not saying that derivatives should be banned or that they're all bad, BUT you're proposition is everything is fine with finance, banks, derivatives and that any attempt to tweak them will fail because clever guys like you will find a way around it. For the people that work at Goldman or JPM the status quo being optimal might be true but it really isn't optimal for many other people.

[KrazyHorse]

The price of oil may go up more today because of speculator price prediction and but it may go up even further tomorrow as more people speculate and participate

And then stupid people who chase herds lose money. More money for people who know what they're doing = more accurate forecasts tomorrow.

[MRT144]

The price of oil may go up more today because of speculator price prediction and but it may go up even further tomorrow as more people speculate and participate

And then stupid people who chase herds lose money. More money for people who know what they're doing = more accurate forecasts tomorrow.

The losing money part wouldn't be a huge problem except that when done on a grand enough scale, the stupid participants don't pay for it, the non participating public does thanks to Uncle Sugar. This is exactly the problem I originally referred to; the government is compromised to the core by the interests of large financial institutions to the point that by being so enormous you can be a stupid herd chaser and face only token consequence for it. Goldman isn't the most egregious in this regard but they have definitely benefited from the blind eyes and bound hands of the government. And Goldman benefits in other ways unrelated to derivatives contracts but that's another can of worms and is unique to being a broker-dealer.

And I'd like to think that we have a system of government in place that can rectify this unlevel playing field but that'd be delusional. The government has picked winners and losers and it's totally unrelated to what is in the best interest of the voting constituent. It's totally related to the donation constituent.

[Ben Kenobi]

prices are random -> They follow brownian motion

Interesting hypothesis. In constant dollars I presume, wrt to micro-economics and across the short term? Prices have tended to go down consistantly when priced out in constant dollars on a macroeconomic scale. There is day to day variation, but in general we see year to year efficiency gains.

[Drake Tungsten]

Oh my god...

[KrazyHorse]

I can't imagine that Ben said anything worth reading.

[Kuciwalker]

Oh my god...

I can't stop running that through my head, trying to see if there was some kind of meaning buried in it...

[Drake Tungsten]

I'm 99% sure it was buzz-word gibberish, but I'm open to the 1% chance that it was a statement of such profound and forward-looking genius that we just can't understand it yet...

[Jon Miller]

any comments KH?

http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print

JM

[KrazyHorse]

I have no insight as to that case at all. However, I will say that I can't take RS seriously after the laughable GS piece.

[Asher]

Ben's post discussing the economics of bareback sex

Epic fail