The riskless trade
May 15, 2013 6 Comments
If you want to know a riskless, free-option trade, it’s student loans, apparently. I heard this from (I gather) Econ Prof. Noah Smith on Twitter. Student loans are riskless for the government and they make the government a free profit (with, did I mention, no risk). You guys should all go all-in into SLABS now. (<—Note: NOT actual investment advice)
His arguments involved two main factors: (1) historically-realized default rates/severities, and (2) the purportedly low correlation in student-loan portfolios, again by which I assume he means historical/realized. Both of these relate to the magic of portfolio theory (which apparently, according to Econ Profs, makes risk go away, i.e. idiosyncratic risk becomes riskless if it’s bundled into a portfolio) and are indeed great prospective risk metrics which, I think you’ll agree, served us so very well during the subprime/CDO crisis. I think some investment bank should quickly snap up Noah Smith to be their Fixed-Income Chief Risk Officer.
I can’t link to any of this because he seems to have blocked me, or whatever bizarrely pussy/cowardly move it is that people do on Twitter that makes me suddenly not be able to find the tweet back-and-forths we’d been sending. (Sorry, I’m still kinda new to Twitter, maybe someday I’ll figure out how to do that pussy move too). So you’ll have to take my word for it. But I did want to record for posterity that I got this hot trade idea of riskless student loans from a Econ Prof, and what it was based on. You’re welcome.