Two vs. One vs. Zero
June 28, 2011, 6:18 am
Filed under: Uncategorized

Deutsche’s firing of top trader sparks probe

No real surprises, but sparks some interesting discussion of correlation trading from ‘Janet Tavakoli, a Chicago-based derivatives consultant’, whatever that is:

…said many bank managements did not fully appreciate the illusory nature of the trading profits being generated from derivatives correlation desks before the financial crisis. She said those profits often disappeared and turned into losses when the underlying assets turned south. “The thing about correlation desks is that it will appear you are making a lot money from trades, but it is all money at risk,” said Tavakoli. “I call this kind of trading an invisible hedge fund.”

My only real dispute with this statement is that it appears to single out correlation trading as if it alone, among derivatives trading, is somehow unique in this regard. All derivatives (as opposed to, say, simply crossing bonds i.e. the pure Platonic ideal of what broker-dealers supposedly could or should confine themselves to doing) put money at risk. All derivatives by definition come onto the book with a valuation that would ‘disappear and turn into losses when the underlying assets turned south’ (for appropriate definitions of ‘south’). If they didn’t, they wouldn’t be derivatives.

They can go south, that is, unless those derivatives are properly and perfectly (!) hedged with liquid hedging instruments. Of course, as a general matter, except for very simple cases, derivatives won’t and can’t be hedged perfectly, hedging instruments won’t always be liquid, putting on the hedges won’t be costless, etc. Although some derivatives (say, equity options) are probably easier to hedge accurately and with little bid-offer cost than others (say, ABS correlation trades). Such things lie on a continuum. So the truth in her statement is that correlation trades had a far greater likelihood for the hedging to slip/fail and the resulting net valuation to lead to losses than would probably be the case for, say, an equity options book. Yes, that is almost certainly true. But this doesn’t make this ‘illusory trading profits’/’it is all money at risk’ thing some sort of unique property of correlation trading alone. Again, please let’s stop with the artificially treating a continuum like an on-off switch.

Besides, is it even true that other derivatives, e.g. equity options, are so perfectly hedgeable that they don’t have the ‘illusory profits’ time-bomb potential? What happened in 1987 exactly? What exactly is supposed to be the perfectly-hedgeable, ‘nice’ derivatives trade? How about an interest-rate swaps book. Surely those never lose money because all their PnL is clean and riskless and they never take positions. Um…no. FX options? Equity index futures? Surely those derivatives have no potential for illusory gains, hidden time bombs, stealth prop trading, or huge losses. Hmmm. Well, I’ll have to get back to you….

The article proceeds directly to an ominous-sounding, yet non sequitur discussion of VaR:

In an early 2010 regulatory filing, Deutsche attributed some of the rise in the bank’s value-at-risk, or VAR, at the end of 2009 to a “recalibration of parameters in the Group’s credit correlation business.”

On Wall Street, VAR is one metric used by a bank to estimate how much money it could conceivably lose in a day if all of its trading bets and hedges went awry. It’s an imperfect measurement, but one followed by most industry analysts.

As I have written before, VaR is nonsense. It is a single number calculated by an army of well-paid Master’s and PhD’s about which the one definitive statement we can make is that it is wrong.

But this article also puts the cart before the horse, treating the ‘rise in VaR’ as if it is an interesting event in and of itself. It isn’t. VaR is a model number that has no effect on anything by itself. What did DB really do at the end of 2009? ‘Made VaR higher’ is just not an interesting answer. Even to say they ‘recalibrated parameters’ isn’t interesting by itself; parameters are just a means to an end (the mark). Marks are what count. Did they mark their book up or did they mark it down? Sure, any model change calls into question the prior model – but clearly some changes are more ominous than others, i.e. remarkings that bring marks in line with the market vs. those that move them away from the market. Which was this? We just don’t know, presumably because the reporter doesn’t ask the ‘derivatives consultant’ or anyone else a question of real importance.

Obviously there is plenty of genuine and deserved embarrassment for DB to be had in this article but what is frustrating is how a true-enough fact pattern can be so grossly misread. The premise of the article is clearly that [such-and-such kind of trading] is a Bad Kind Of Trading, and this bank was guilty of it, and now they’re embarrassed and trying to get out of it, because of the Volcker Rule, because it’s hedge-fundy, or some such thing. My dispute is not with the embarrassments listed. My dispute is with the conceit that one can single out this kind of trading as the Bad Kind Of Trading, and somehow distinguish and then firewall it off from all the Good Kind Of Trading that banks do that (supposedly) isn’t risky, or dependent on opaque valuation methods, or hedge-fundy, or whatever bogeyman we are supposed to blame for The Financial Crisis.

Maybe I’m dumber or denser than regulators and Congressmen and ‘derivatives consultants’ and Reuters reporters, but I just don’t really see the two easily-distinguished kinds of trading that everyone else seems to. I don’t see these banks’ activities as separating neatly and cleanly into the (bad, nasty, tainted) “prop”/hedge fundy activity and the Nice, Sweet, Organic, Free-Range Trading that supposedly are the banks’ bread and butter, and that they could somehow get back to with clever enough regulations.

Although I obviously see and acknowledge differences lying along a continuum, I really only see one kind of trading, not two. You can artificially rope off the one and ban it, while keeping the other, but I don’t know what you think you’ll be accomplishing other than to incentivize banks (& the shadow banking system), as staffed by even more highly-paid personnel, to proceed to explore the boundaries you’ve just artificially drawn and patted yourself on the back for doing so.

As such, I have grown well good and tired of the ‘let’s identify and purify our village of the Bad Kind Of Trade‘ subgenre of financial criticism. To paraphrase (and improve upon) Ben Stiller’s frustrated (and incorrect) little soliloquy to Darryl Zero in Zero Effect, there aren’t evil kinds of trades and innocent kinds of trades. It’s just… It’s just… It’s just a bunch of… trades.

Worse Than Distraction
June 28, 2011, 1:12 am
Filed under: Uncategorized

As someone who thinks we should remove all military personnel from Iraq and Afghanistan and cease all related expenditures, I welcomed the news I think I vaguely heard about President Obama pulling out of (?) Afghanistan, or whatever it was exactly that was announced and discussed last week while I was flipping car radio stations1 on vacation.

(As with most of President Obama’s acts, it’s very difficult to determine whether this thing that was done? announced? memo’ed? was purely rhetorical, or actually will result in some tangible activity somewhere down the line.)

The only question I have, however, is for all the lefties out there: Is this what y’all meant by “focusing on the Real War On Terror In Afghanistan”?

I mean aren’t you angry? Not only are we now “distracted” from fighting in Afghanistan, we’re apparently (?) going to pull out altogether! Which totally pisses y’all off, because of how much you totally SINCERELY cared about that military action, about “focusing” on it, about not being “distracted” from it, and all.

I mean….right? Or am I misremembering about 10,000 totally-sincere arguments I endured and totally took seriously as worth addressing at face value between 2003-2008? Let me know and thanks in advance.

1Side note: According to my admittedly unscientific sampling of radio stations up and down the East Coast, a randomly-chosen song drawn from the measure space [songs played on the sort of FM radio station I'm not likely to instantaneously skip past] is, at this time, probabilistically likely to be – in descending order -

  1. “The Logical Song” by Supertramp (3x)
  2. “Don’t Stop Believing” by Journey (3x)
  3. “Take It Easy” by The Eagles (2x)
  4. that F-word song by Cee Lo Green (sp?) (2x)
  5. “The Spirit Of Radio” by Rush (2x)

So now you know.

Memo To All Media Screenwriters Who Put Homosexual Characters Into Their Scripts
June 28, 2011, 12:50 am
Filed under: Uncategorized

Just because a person is homosexual, doesn’t automatically make them interesting.

(Apropos of nothing in particular. Just needed saying.)

Declinism Should Always Strive To Be More Funny
June 28, 2011, 12:48 am
Filed under: Uncategorized

I’ve been puzzling over this (somewhat entertaining but ultimately embarrassing) thing that Randy Newman apparently made in 2007. (HT PowerPop)

Such a curious historical document, isn’t it?

Just four years later and it’s basically inconceivable that Randy Newman – beloved middle-of-the-road songwriter, Pixar crooner – would have even felt the compulsion let alone the need to record that video. And why? Only one reason of course: the President now has a (D) after his name rather than an (R). So it’s all good now, and back to “You Got A Friend In Me”! Nevermind!

Such a difference one single letter can make to the psychology of so many! Has this been studied?

But what’s really jarring is the stuff at the end about how our “empire” is “declining”. In this (rather commonplace) telling, the “decline” of our supposed “empire” is always painted as a somehow poignant, almost tragic thing by the declinists. Like: they say it more in sorrow than in anger, as the sage bearers of bad tidings to the rest of us. But aren’t lefties supposed to hate empires? What would be so great about us being an empire, even if we were one?

Second, whatever else we are, good or bad, we’re simply not an ‘empire’ and we don’t have one to be ‘declining’ in the first place. None of the declinists are even using the word correctly, or even in a way consistent with how they’d use it elsewhere. So what do they even mean by it? And what do they mean by wisely, knowingly predicting its ‘decline’? What about us is so supposedly ‘declining’? Are they using ‘empire’ as a synonym for ‘country with the largest GDP’, or some other (stupid) decline criteria?

I think what really happens in the mind of a ‘declinist’ is that he wants to be an interesting participant in an important drama. One way to do this is to be on the winning side of a Historic™ election. But if you were on the losing side, you walk around in a fog of resentment over how there’s no way for you to see yourself as heroically dramatically important for the next four years. So you invent stuff to fret about, dramas to place yourself at the center of – things like a Disastrously Wrong War, or a Declining Empire.

Now you’re interesting! Stuff’s happening!

When I was younger I sometimes had this weird impulse to have chaotic, safely-dangerous stuff happen in my life. Stuff that always seemed to be happening to more interesting people. Someone would come to school Monday morning with a story of how, say, their car broke down on Skyline boulevard on Saturday night! And they had to push it and it was dark! And then some bikers came by and threatened them with broken bottles, but drove away! Meanwhile the car was rolling down a hill and they barely jumped in in time to throw the emergency brake! But finally a cop came by and helped them with a jump start! But they were lucky cuz they hid the beers they had!

Or whatever.

I’d hear “interesting” stories and feel a certain twinge of something very much like jealousy. Why does my mom have to so religiously maintain the car with regular tune-ups and oil changes? Why couldn’t she left stuff slide, so that something might actually threaten to happen? Why did everything have to be so predictable and safe?

These are the thoughts that can occur to you when you live a safe, protected life. You end up with no stories to tell. The thing is, though, I’m pretty sure I outgrew this feeling; I no longer wish for the ‘chaotic’, but something close to its opposite.

Declinism, however, strikes me as springing from that very same impulse, a longing for chaos, for drama, for ‘interesting’ things to be happening. This explains why wealthy, coddled entertainers without cares in the world can pop up (when the leaders have the wrong letters after their name) spouting declinism, conspiracy theories and the like. They have literally nothing else interesting in their lives to be going on about.

Don’t get me wrong. The longing for drama is perfectly natural and everyone experiences it. I’m certainly no exception. I guess I’d just say that if I’m going to have to sit through the working out of someone’s psychological angst over having a sheltered, prosperous and privileged life, I’d much rather it at least be hilarious:

HT Fourth Checkraise

The Cars Franchise Is This Generation’s Star Wars
June 26, 2011, 9:25 pm
Filed under: Uncategorized

Everyone knows that Cars was the least-critically-adored Pixar movie. It’s the movie that critics feel safe beating up on in order not to seem like slavish Pixar devotees for lavishing so much drool on the Toy Storys, Wall-E and even Up. I’m not sure I’m even an astute enough movie watcher to know whether the critiques are deserved (yes, I recognize that the basic story was more or less Doc Hollywood warmed-over, but so?), so I can’t necessarily rebut the critics. I just know that for whatever reason – too NASCAR-oriented for SWPLs? – it’s clear that Cars doesn’t have the Gen-X-approved Pixar cred of their other films.

But I can only assume most of those critics don’t actually have small children. As I’ve tried to explain privately in emails to some fraction of my 2.3 readers, to small children, Cars was a world-changer.

In fact I get the feeling that it is the closest thing to this generation’s Star Wars. What the Star Wars franchise was to roughly anyone (or at least, any boy) who was between roughly 4-8 years old when one of the original three came out, Cars will be remembered the same way by today’s 4-8 years olds. Not Harry Potter, and not even Toy Story. Which, don’t get me wrong. The Toy Story movies are great. I sincerely still maintain that Toy Story 3 ought to have been last year’s Best Picture Oscar winner. My personal favorite Pixar movie, and maybe one of my top 10 favorite movies of all time, is The Incredibles. But to the little kids of today, these just don’t seem to rival Cars in the imagination. Here are some of the reasons why.

1. Self-contained universe. Of course, all the above mentioned movies/series have a well-fleshed-out, self-contained universe, as this is important for any kiddie fantasy. A simple yet rich world with good guys and bad guys, with rules of its own, that seems large and endless, yet which isn’t complicated by boring/confusing real adult world stuff, so that it can be easily studied and ‘debated’ in and of itself by kids. Jedi vs. Sith, Gryffindor vs. Slytherin, Rust-eeze vs. Dinoco. Darth Vader, Voldemort, Thunder. Other series may do it ‘better’, but Cars does have a universe that feels as if it’s large and fleshed-out, yet understandable, and can hold as many stories as needed. What this does is give kids a large but manageable list of facts about the world to memorize and feel good about memorizing. Adult Cars-watchers may not have remembered that the roadside hotel (with orange-cone-shaped rooms) in Radiation Springs is called the Kozy Kone Motel, for example, but kid repeat-DVD-viewers definitely do.

2. A rich list of colorful but mostly blank-slate character types. The Toy Story series has basically two interesting characters (Woody the good guy, and Buzz the confused spaceman who embraces his newly-discovered toyhood), and a huge supporting cast that is entertaining but – like many of their jokes – is probably more interesting to adults than to kids. Kids have no emotional connection to Mr. Potato-Head, for example; kids today probably don’t even know that Mr. Potato-Head wasn’t just made up for the Toy Story series like Woody and Buzz were. But Cars came fully decked out with about a dozen instantly-recognizable stereotype characters that easily slide into kids’ imaginations, even the relatively small characters in the movie (the Sheriff, Ramon) that loom disproportionately large to the kids who were paying attention.

3. Action figures/craven marketing. Of course Cars – like Star Wars – was a genius idea simply for the marketing potential. At its most calculated level it’s basically a movie-length CGI commercial for endlessly-sellable lines of little made-up car toys that can cost $9.99 a pop or more. Combine this with fact #2 (all the different stereotype characters) and you have a potent force for making the franchise loom larger in kids’ imaginations than anyone seems to realize.

Add it all up and you get the fascinating spectacle of a four year old coveting his friend’s “Dinoco Thunder” toy, which as far as I can tell is just a different-painted version of the side villain-character “Thunder” – a version which, as far as I recall, didn’t actually appear in the movie except by implication (since, having won the final race, and Lightning McQueen having turned it down, Thunder would have presumably been offered the Dinoco oil company advertisement contract? I guess). Not that the four-year-old really understands much of that, except in broad outline – but he wants it. It is as absurd, yet as meaningful, as the fact that Star Wars kids could long for a stupid “IG-88″ or “Hammerhead” action figure on the basis of like 3 seconds of screen time, or needed to have both the classic and the “snowsuit” Han Solo, or became so illogically fascinated with the side character Boba Fett (who essentially doesn’t speak and barely does anything, certainly reveals no character).

Critics are now mostly – Roger Ebert being an unexpected exception – in the process of giving Cars 2 a righteous drubbing, and I expected nothing less. It will kill at the box office. It has also, like Empire Strikes Back, surpassed the first film both in scope and in number of characters, settings, and emotions. I enjoyed it a lot. But more to the point, I think I’d rather ride the wave than try to fight it. Lightning McQueen is now Luke Skywalker for these people, and one needs to respect that.

Why People Who Want More Than One Line Are A-Holes
June 26, 2011, 8:29 pm
Filed under: Uncategorized

Situation: You’re waiting in line for a cashier who has two sides on which he can ring up patrons. You know exactly who’s in front of you (it’s like three people/groups). The guy behind you taps you on the shoulder and says, “Are there two lines or only one?”

Here’s what he’s really saying: “I’d like to cut in front of you.”

After all these facts are not in dispute. 1. You arrived before him. 2. We’re all going to see the same dude eventually, one way or another. 3. If there’s one line you will definitely get rung up before him. 4. But if there could be construed to be “two lines” then, due to the alternating nature of who the cashier sees when, the guy behind you might actually get rung up before you by that guy.

Like, if you choose the wrong “line” in which to stand.

Since the guy behind you is asking, this is evidently what he’s hoping for. He wants to cut in front of you. Otherwise he wouldn’t ask, because he wouldn’t care. If he had no intention of cutting in front of you, whether there was one line or “two lines” (to see the same dude, remember) would make no difference to him.

By the way, the same also holds true in a situation with multiple cashiers, it’s just that in those cases it’s usually less egregious because multiple lines can be a geometric necessity.

So basically, anyone behind you in a line who asks you this question wants to screw you over. There is no non-screwing-over motive for ever asking this question.

Have a nice day.

P.S. True story.

Cancer Cure Exposes The Cancer In Our Institutions
June 14, 2011, 3:25 am
Filed under: Uncategorized

I have no way of knowing whether the cancer treatment that is the subject of this documentary works. (HT Seth Roberts) I do know that it’s impossible to watch that documentary all the way through – which I did – without feeling infuriated and disgusted. But most of all, helpless.

The long and the short of it is that a doctor in Texas has been using some chemicals to treat cancer, based on his own theories (and patents), and has undeniably found some success where others have not. So – of course – the full force of the government has been thrown against him. The government filed patents on the same substances, and not so coincidentally over the course of decades has attempted to have him suspended, prosecuted, thrown in jail. Partnership with pharmaceutical companies is involved, the FDA is involved, the NCI is involved….

As the documentary mentions, pharmaceuticals are a huge business – perhaps the biggest – and cancer is a key driver. But it’s not just pharmaceutical companies; you can’t blame this all on Big Pharm. Consider all the doctors, clinical instructors, textbook writers, sales representatives, receptionists, MRI techs, linear accelerator techs, CT techs, chemo techs, postdoctoral researchers, therapeutic medical physicists, diagnostic medical physicists, nuclear medical physicists, medical dosimetrists, radiation safety officers, field service technicians, electrical engineers, nuclear engineers, government safety inspectors, fund-raisers, pink-clothes-wearing Walkers, trade-fair girls who hand out pens and fridge magnets, hot redhead radiation oncology residents, hot Serbo-Croatian Medicare code-entry clerks, hot half-Asian nurses, hot…erm, sorry, as usual started to get too specific there…anyway, just consider the huge army our society has currently mobilized that are in some way involved in the business/assembly line we know as “cancer treatment”. A business which, as it is currently constituted, consists primarily of repeatedly squirting poisonous chemicals, radioactive rocks, and/or beams of ionizing radiation into peoples’ bodies, and simultaneously (no less an undertaking) filling out forms for “reimbursement”.

Yeah, so this guy’s approach doesn’t use any of that machinery. He makes some stuff out of urine & blood plasma, and that’s what he uses. So, like, all you folks busily working on getting your paper published on (or trying to sell high-priced gadgets for) high dose-rate brachytherapy, or the latest and greatest chemotherapy, or proton therapy? If his thing works then…nevermind. Go find some other career.

Which would all be well and good, you might say, because can’t a Merck or Pfizer just pivot and devote all their machinery to pushing that stuff, if it really works? What do they care what gunk they are pushing, they can still just give it a dumb-ass made-up name and sell it for thousands of dollars a course, like they do everything else. Well in this case they can’t do that, you see, because he owns the patent on this particular gunk. They don’t.

This documentary makes it starkly obvious that an individual guy with a medical patent is a pariah, a menace who just doesn’t really fit into our system. That’s why he must be either crushed, or his method discredited. At least until a big pharm, or better yet the US Government, can patent it themselves. So what is the root of the problem here. First, it is the FDA. Second, it is the patent system.

And the frustrating thing is, once you have those two forces in play, the rest of it plays out in an entirely predictable fashion. Of course pharmaceutical companies would want to discredit a new treatment unless/until they could co-opt it. Of course those in responsible roles in government would have temptation to be bought out by corporations with big pockets. Of course the FDA’s role as drug-gatekeeper would be harnessed by the existing treatment establishment to quash new treatments. None of this is at all surprising.

Nor does it even require malice or malevolence on the part of most people involved. The vast, vast majority of folks working in this area – like in most areas – are decent people doing an honorable job at what they’re tasked with. Existing rules and structures are all undoubtedly well-intentioned. Nevertheless something about the institution of government, or regulators, or corporations, or all the the above conspires such that the result is pure malevolence grown out of control. From all these good intentions and hardworking smart people, outrage and crime results. The most apt metaphor that comes to mind, in fact, is cancer itself.

One thing that does seem required are the Smart People. The Smart People peppered throughout all these institutions seem to act simultaneously as the dupes and the enforcers of the greedy and venal who would use these institutions, and their power, for personal gain. For every time a treatment like this is said to be discredited or unproven because it ‘needs to go through a randomized controlled trial’ (that the FDA will not allow to proceed in good faith), there are a thousand Smart People out there to nod their heads, because that’s exactly what they Smartly learned in their Smart schooling.

Again, though, I do not say I know much about this treatment. I will say though, that having seen radiation therapy in action, if I had something like brain cancer I’d much rather cast my lot with this doctor than to go through the external-beam/chemo/repeat assembly line.

But maybe I’m just not so Smart.


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