Finance is a bitch of an environment to work in, especially if you are coding in C++! You can end up spending endless hours staring at tiny bits of strings and numbers, wondering what the hell is happening. It can get to be quite a bit of a pain, as the problem is compounded with real time data, and if you are working with something like NASDAQ, you can be looking at 27 GB of data a day! That's pretty much alot of trades, but NASDAQ is pretty much as big as the whole of Europe combined in the number of trades that go on during the day (So whomever said the USA is declining as a superpower, please get a clue - far from it).
Anyway, I've always had issues finding any conclusive interview preparation when it came to programming and finance, because what I think that there is a critical gap between the developers and the bankers, a sort of digital divide, that the bankers are pretty much idiots when it comes to technology, and all us developers have taken jobs with NO FINANCE EXPERIENCE REQUIRED at the bottom of the job description........ I don't know what can be done to fix that, and i dont really care because I've done my own homework when it comes to finance. So maybe some time when am not stressed about that damn feed handler, I'll propose a new recruitment philosophy and arrogantly blog about it.
So to the meat. Here are some questions (and answers mind you) I have encountered, whether through being interviewed or interviewing, or just plain day-to-day issues I came across.
In no particular order:
1) How many vtables do you have in any particular program?
A: C++ maintains a virtual table for each class within your program.
2) What is the difference between allocating memory using new and malloc ? What are the disadvantages of malloc?
A: New allocated memory on the heap, while malloc allocates memory on the stack. Memory allocated using the heap will live throughout the lifetime of the program, while malloc goes out of scope as soon as the method/class it is contained in returns. Malloc is also bad as it can lead to memory leaks, and running out of memory if we do not free the memory we allocate. In addition, malloc will allocate a fixed chunk of memory that is static and must be set by the user, while that is left up to the system when you use new. New also invokes the destructor automatically
4) What is the difference between free and realloc ?
5) What are the four methods that are provided for you with by default when a class is invoked?
A: Constructor, destructor, copy constructor and assignment
6) How many bits in a byte? Give an example of where you would want to use bit manipulation in a financial context.
A: 8 bits in a byte. If you are receiving messages from a trade, you may want to move pointers around the bits and bytes to read through them.
7) So you are receiving messages from an exchange - in a tag->value format. What would be a suitable data structure to use ?
A: A map.
8) So you are using a map, what is the disadvantage of using erase()
A: when u erase an element from a map, the map reshuffles, and ur pointer may either be pointing to null, or to a different location in the map.
9) What is the size of a pointer?
10) What is the difference between a shared pointer, an auto pointer and a regular pointer.
share and auto pointers are smart pointers. Smart pointers own the object they point to, and thus are responsible for deleting it (calls delete on itself). An auto pointer is a regular pointer wrapped by an object that owns this pointer, and deletes it when that object goes out of scope. Shared pointers compliment auto pointers, and you don't need to know who owns it. When the last shared pointer for an object in memory is destructed, the wrapped pointer will also be deleted.
11) What is a pure virtual function? What would be a scenario when u would need to declare a virtual function as pure?
A: A pure virtual function has no implementation and it usually belongs to a parent in a parent-child class hierarchy. Rather the implementation is left to the inherited class- yet pure virtual functions force inherited classes to implement that function, yet when that method is not pure, the child class does not need to implement it. (Although it can).
12) What is the difference between overloading and overriding?
A: Overriding is usually in inheritance, that u override a function in the base class by re-implementing it in the child class, usually by having the same function with a different implementation, while you overload operators or functions that have the same name but different signatures are thus overloaded. Another flavor of overloading would be operator overloading, where u can use the + operator to add an integer to a pointer for example.
12) What is the recommended maximum level of inheritance in any number of classes?
A: Try to restrict your parent child relationship to 3 levels : parent-child-grandchild. Deeper levels can lead to circular references and confusion.
13) Assume you have a child class, and you declare an object of type of the base class in the child class. That object is pointing to a method in the child class. What happens when you delete the pointer? (An asshole in New York asked me this during an interview)
A: (This one still escapes me, if anyone has an answer or better explanation, give me a shout).
14) What is the difference between private and protected?
A: Private functions are private to the class itself, and its children, but none else. Methods declared as protected are accessible by friend classes.
15) What are forward declarations?
A: Forward declarations allow us to declare objects before providing definitions for them. That's probably why you would need to declare ur methods in ur header files first. You can use them in ur program and it would compile even before u implement them (or just have an empty { } implementation).
16) What is an abstract class?
A: An abstract class is a class containing at least one abstract method - an abstract method is a method declaration without any implementation.
17) What is the difference between a copy constructor and constructor ?
A: A copy constructor is a constructor that takes an object of itself as an argument:
class MyObject (MyObject A);
18) What is the lookup time of a hash table? How about sorting it? What can be the worst case scenario?
A: O(1) for lookup, O(logn) for sorting. The worst case scenario for hash table sorting is O(n) if heavy chaining occurs - i.e. lots of collisions with all elements having the same hash value.
19) What is the lookup time for a Binary Search Tree? How about sorting it?
A: O(logn) for lookup, O(nlogn) for sorting.
20) What is the reference of a null pointer?
A: Null pointers always point to reference 0 (zero).
21) What is a vector?
A vector is a dynamic array of any data type. The associated methods are pop(), push_back(element), size()
22) What is the difference between string messages and packets?
A: That depends on what your packet looks like, but the general idea is that packets have a header and a trailer, with checksums and CRCs that could allow you to reconstruct lost or partially received messages.
23) What are the advantages and disadvantages of using a TCP-based connection? How about UDP?
24) Can you implement a queue with two stacks? How about a stack with two queues?
25) Which of these tuples are alike? Why?
AABBCCDEE - 11233445566 - EEFFGGHII ,
AAABBBDDD - AAABBBCCC - CCCDDDEEE
11375500 - 09455901
ABCAABC - XXXYZZZ
Answer: In fact, all the above are alike except AAABBBDDD- AAABBBCCC - CCCDDDEEE because there is not enough information to make an assumption.
a - AABBCCDEE - 11233445566 - EEFFGGHII are alike because if there is only one byte that is alternating its position. For alphabetics based strings, the 3rd bit from the right-most side is a single digit and its alternating position to become the 3rd byte from the left most position for numeric based strings.
b-113755900 - 094559001 , this is a time indication. 11:37:55:900 (hours, minutes, seconds, milliseconds
c-ABCAABC - XXXYZZZ : these are palindroms from the look of it.
27) Give an example where u would need to use bit shifting.
28) In Finance, time and timezones are of essence.
29) What is multiple inheritance? What are its advantages and disadvantages?
Multiple inheritance is mainly a C++ charachteristic, that allows classes to inherit from more than one class (disallowed in Java). The disadvantage is that it may lead to ambiguity.
29) In binary trees, describe preorder, postorder and inorder traversal.
More questions to come.
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Friday, 17 July 2009
Saturday, 18 April 2009
Soros and Sterling
Yesterday I was walking back from my lunch break, and I stopped to pick up a coffee. Having no cash I nipped to the adjacent ATM machine to withdraw a 10 pound note. Disintrested and my mind completely elsewhere I put my card and followed the all too slow process of withdrawing cash. In automatic motion I clicked the buttons and saw some thing yet my fingers were still pressing and I had my cash before I vould realize that this ATM machine gave me the option to withdraw euros. Now I found that rather strange. It was Liverpool Street station and Stansted airport is on the route but I I had just finished George Soros' book, and a few thoughts came to mind. The dollar is looosing ground, but is it thathappening THAT fast?
Soros, in his book, The New Paradigm for Financial Markets : The Credit Crisis of 2008 and What it Means, talks about how the dollar is loosing ground. Now what I like about Soros, that he acknowledges some important events and if he was not a financier, I bet he would have made a good historian. He talks about the Arab Oil Embargo of 1973, when the recycling of Petrodollars by the banks pushed the dollar to become the world's currency. (Funny how the oil embargo served rather than tarnished Western domination - well, it did negate Keynsian economic theory though, so Arabs did have some effect on the 20th century). Countries with weaker currencies, with weaker currencies and unstable economies, either used the dollar as a reserver currency, pegged there currency to the dollar, or those going the distance, dollarised their currency.
According to Mr. Soros, who, for the sake of entertainment, graduated from LSE the same year Paul Volker, the ex-Fed chairman and now heads Obama's Economic Advisory board (they graduated in 1952), thinks that the days of the dollar as the world currency are numbered, if not over.
According to Soros, the international financial system is under the control of number of financial authorities representing the developed countries, mainly the IMF, the World Bank, and if I will allow my self to add to that the SEC and the FSA, which both are watchdogs for the financial centers of New York and London respectively. These institutions, as he says, are "more equal than others". They constitute the Washington Consensus. The Washington Consensus is a set of "10 commandments" for countries to adopt as policies for economic development (such as privatization , free trade, tax reform and similar neo-liberal guidlines, and of course, deregulation), and in exchnage they receive aid from the Bretton Woods institutions. This leads to a globalized economy, and the way the system is structured, the United States, and to decreasing decrease the UK and the world's biggest economies enjoy veto power.
This structure, and specifically the deregulation that was so strongly encouraged, looks great when its working, yet when a sever crisis such as the current one comes a long, it shows how fragile the system is, and it all comes crashing down. With the car industry failing, the banking in shambles, and the housing market crashing, the US will be forced to into converting some of its reserves held in bonds , and some of its assets into cash to finance all these rescue packages and TARP funds.
The dollar is loosing ground.
"The invasion of Iran has much to do with the rise in the price of oil and the unwillingness of the rest of the world to hold dollars. This will reinforce and extend the current commodity boom and create inflationary pressures. The decline of the dollar as the generally accepted reserve currency will have far reaching political consequences and raise the specter of a breakdown in the prevailing world order. Generally speaking, we are liable to pass through a period of great uncertainty and destruction of financail wealth before a new order emergrs." (Soros 2008).
Soros should know a thing or two about currencies. He sure knows about the sterling, as he almost single handedly broke the Bank of England in Black Wednesday in 1987, when the BoE withdrew the pound from circulation before the markets closed. He should know about the dollar as well I guess, he did co-author a book with Paul Volcker !
Which brings us back to the ATM machine in Liverpool Street. Is the Euro the new currency? Or is it just the bank being clever, trying to get customers, or is it the customers demanding euros in atm machines? I talked about the Amero and the Khaleeji in a previous post, but, all these are pretty much either in the not-so-near future, or may never even materialize, but with the sterling at just 1.1 against the euro, I am thinking, is this the end of the Pound?
Probably not, but this ATM sure yanked my chain....or did it?
Thursday, 15 January 2009
Finance for Engineers - The Advanced Stuff
Some more finance terms for the engineer..... With time working in a financial software house, you learn alot about finance, although at some point you decide that you have to do your own homework, and piece things together because, the future may take you to a trading desk, and you find yourself working on the Monte Carlo algorithm....
- Splits : Companies can "split" their stocks. i.e. If the value of 1 share is £100 and the company issues a 2:1 split, this means every share will become 2 shares, and the value of the individual share is adjusted accordingly, i.e. each share will be now valued at £50. The shareholders themselves still maintain the same stake valued at £100, but instead of owning one share, they now own two (neat!). This gives them more flexibility. Also, once a split occurs, this will affect the stock price (up/down increasing trading activity) , and there can be all kinds of splits with ratios such as 10:9 , giving leeway for financial (mathematical) modelling! Another issue is that the more a company has in number of stocks, i.e. volume, the more possible shareholders it can have, and the more shareholders it has, the more complicated hostile takeovers become.
- S&P500, FTSE 100: The index of the top 100 or 500 companies/stocks (depending on geographic location) and their performance which is used as a benchmark for measuring market performance. (See my post about The New Barbarians, in reference to the power of these ranking institutions. They even rank countries! )
- Dow Jones Average Basically to measure the performance of the stock market. It's measured in points, or dollar per share. Simply enough (I think) is the total number of points traded on the market that day, compared to the previous day. If greater than one, market is up, if less than one, market is down. A value of one means the stock market performed exactly the same (hardly ever the case).
- Basis Points: 1/100 of a percent, or 0.01%, which is used either to measure the yield of (fixed income) securities, or commission some traders may be basing their deals on.
- IPOs: When a company decides to go public, it will have an Initial Public Offering, which is when it first issues it stock to be traded on the stock exchange(s). Usually, one (or more) of the investment banks would be the advisers of the company on how to handle the IPO and how to price the stock, based on initial asking price.
- Spreads: Stocks can be volatile i.e. have a given amount of risk. The spread is the measure of risk between investing in government bonds (risk free) to investing in stocks (risk avert).
- Arbitrage: This is a tough one. Arbitrage is basically betting on two different trades in different industries/domains that are usually (but not necessarily) different (or in a sense arbitrage sense- opposite). Hence if one trade (or the dependent market) performs badly, means the other is performing well, and vice versa, so one will make profit, and the other won't, therefore, exploiting the difference, the trader would make a profit. Of course, the trick, is to have it pay off significantly to cancel out the loss, and make a profit. Nothing is about breaking even and its not a zero sum game. (hardly) * Volatility: The measure of how much the security price fluctuates, and how varied the fluctuations are. i.e. a highly volatile stock is a stock that can go up and down 25% on day-to-day trades.
* Exposure: Is the risk to which a given asset is threatened by. i.e. if a company has an asset worth one billion, and its exposure is 5 billion, means that its trades are valued at 5 billion, except it only has assets worth 1 billion. The importance of exposure is that if the company goes bust, it looses its assets, but the loss is much more than the worth of the assets. - Bear Market : When a market is said to be a "bear market" means that its going down. When a trader is said to be "bearish" refers to him being pessimistic about the market
- Bull Market : When a market is said to be a "bull market" means that its going up. When a trader is said to be "bullish" refers to him being optimistic about the market
- Hedging : When a fund hedges, it makes certain investments to reduce risk on a given security.
- Models: Usually mathematical, quants create algorithms and models to simulate and predicate market behavior and/or the future of a security or market (by quantifying market factors)
- Trades: The transaction of selling or buying a security.
- Hostile Takeovers: Is when a company or fund takes over another company through a majority stock buyout, against the will of the stakeholders. Splits are one way of increasing the volume of stokes and thus increasing the number of shareholders, making a hostile takeover more difficult.
- Leveraged Buy-outs: This is a scary one. A leveraged buy-out is when a company or investor begins on issuing bonds based on the assets of the company to be taken over. Imagine! You are issuing bonds whose underlying assets are the company you "will" buy-out. i.e. if the buy out fails, those bonds are worthless- but, well, the acrobatics about this, is that you issue bonds as a way of raising enough cash to force the buy-out and make the company's assets as your own, and be able to backup your bonds! (financiers are crazy!)
- Buy Backs: Is when a company buys back a number of its own shares, to reduce the number of shares, and giving its current shareholders a bigger stake, thus raising the value of its stock. This is opposite (not quite though) to a split. This is a positive sign that the management is optimistic about the future of the company and think its current stock price is undervalued
- Premium: When a bond is purchased before its interest or is due.
- Short Selling: (complicated) This is basically when someone is selling stocks he does not own.
- Liquidity: Th ability of transforming assets into cash (liquid money) without any loss to its value. Usually the root problem for leverage and exposure
- Overvaluation:when a stock is mis-priced, and analysts give it an estimated price that is unrealistic and higher than it actually is worth. The trick is that overvaluation only is exposed as over-valuation when the stock price goes the other way, and people end up paying more for it. (This is sometimes picked up by traders as a misprice, and they go back-to-back on the stock. Serious shit I am too young in the business to figure out)
- Undervaluation: the inverse of overvaluation - usually a bargain for the buyer, a loss for the seller.
- Default: When a company defaults, usually on a bond or loan, means it has declared that it cannot and will not be re-paying the holders of the bonds or debtors for the money they paid for this bond. (related to bankruptcy, but not quite).
- FSA: Financial Services Authority. Is the governing body of the Financial industry in the UK. It's a non-governmental, independent organization whose primary function is to insure efficient, fair and good business operation in the finance industry. i.e. it regulates the operation of financial institutions and individuals and prevents illegal practices such as insider trading, fraud, unfair advantage, etc...
- SEC US Security and Exchange Committee. The US equivalent of the FSA.
- Black Wednesday: September 16, 1992 in the UK when the British government had to withdraw the pound from the European Exchange mechanism.
- Black Monday: October 19,1987. When the Dow Jones dropped 508 points, with markets crashing anywhere between 20 and 45% around the world. It was the largest one day percentage decline in stock market history.
- Russell Index : The Russell Index is a capitalization-weighted index designed to measure the performance of a market consisting of the 2,000 smallest publicly traded U.S. companies (in terms of market capitalization).
So what is actually traded?
Need not get into Economics or philosophy on currencies, market behaviors etc. The bulk of trade is commodities (money itself is a commodity), and their derivatives.
Note: These are notes I made myself, and I hold the nominal copyright. I have passed them over to work colleagues but I am the originator, just in case somebody is wondering.
Tuesday, 30 December 2008
2008 Re-visited
It's 1:30 am , as the last 24 hours of 2008 start ticking away. I'll be stumbling off a boat at this time tomorrow, as I am taking a boat trip on the Thames for new year. Today, though, I was doing my last 2008 wander around London, and I ended up picking up a few books to add to my already big pile of unread books.
When it comes to books, I tend to buy more books than I can read, but considering the fact that everything I own fits in two suitcases, the one thing a man can never have too little of, is books, even though if he doesnt end up reading all of them, but at least he always motivated to read more and more, but the more you crave books, the more books you buy and the more books you read and so on and so forth, so its like a positive feedback loop.
The same can't be said about 2008. Rather, its the complete opposite. A vicious circle.
Where can we start? The Bear Stearns debacle, Jerome Kerviel, the housing market crash, Northern Rock, Bradford & Bingley-Loyds, the 500bn£ bailout, the 700bn$ bad asset plan, Lehman going bust, Merril being bought out, and Citigroup on the brink.
This is a funny video.
"This crisis is not comparable to 1982 banking crisis, the savings and loans crisis of 1986, the portfolio insurance debacle of 1987 , the failure of kidder peabody in 1997 or LTCM in 1998, or the technology bubble of 2000. The crisis is not confined to a particular section of the financial system but has brought the entire system to the brink of breakdown." (Soros 2008)
The stock markets worldwide have lost anything between 10% and 45% of their value, and they are still declinining, with no sign of solid recovery anywhere in site. But to say recovery, is, in my opinion, wrong. Each of the crisis mentioned above, were what you can call bubles, and bubles grow until they burst. The credit crisis, is somewhat of a super-bubble. It's size really was far larger than any other buble. That's really because of two things: deregulation, and greed. One must give the good and the bad sides of things, though. The good thing starts with the beginning of the maturity of the banking system, that in my opinion, we are just beginning to understand what it means "money is a commodity" , and that money is just like raw material, oil etc. Banking, is just like any other industry, a producer, and their product is money. Yet, because money is a lubricant for transactions, and having it is vital, its actual value was greatly inflated that with all this credit derivatives, credit swaps, leveraging, shorting, spreads and all these nitty gritty terms that any financier will throw in your face, was all based on perception. Perceived, or, to a lesser term, estimated value of this product called money, which was, in theory, backed by "real" assets. When spreads for lending reach 40$ against 1$, there must have been some problem with the "product" : money.
When bankers can come up with a financial product within an hour, sell it, break it up, re-package it, re-sell it, at some point, something was bound to go wrong.
And its usually humans that go wrong, not the system, not the markets, and definitely not any electronic trading system.
Economics is not a science, simply because economics has an element of human intervention, which is why it is a social science, when pure science is simply the explanation of natural phenomena. (Now the LSE being a social sciences institution makes a whole lot more sense). Nick Taleb mentioned that bankers have been fooled by randomness in thinking that there actual study of the markets behavior over a certain period, can help them estimate how the market will behave in the future, and bet on that.
This is a nice pic.
I dont say markets are completely unpredictable, but i am not saying they are predictable either. It's just like people, you can have a fairly good estimate about how people will behave, but there is always this X-factor, a black swan, that can negate everything, and as long as people are the ones driving the markets there will always be that element, and the more we give the people in charge this liberty, the higher risk we run on another crash. Crashes will continue to happen, but you dont want another one of this scale, which is why I agree with Mr. Brown on more regulation. Regulation will bring a better understanding of the "money product".
The Germans and the Italians have a fairly good idea on how to build a car, but with a monolith lik GM in trouble of collapse, even well understood legacy products, and how to deal with them, will always remain as an element of risk. Why? Simply because of people. Some people just don't like driving, if you catch my drift.
Anyway, I quote George Soros when I say "History does not repeat itself [at least in finance]. The collapse of the banking system in 1929 was the cause that lead to the Great Depression, and that is why governments will not allow the banking system to collapse."
So, as gloomy as 2008 was, we'll come back, stronger, better, faster. .....I hope!
When it comes to books, I tend to buy more books than I can read, but considering the fact that everything I own fits in two suitcases, the one thing a man can never have too little of, is books, even though if he doesnt end up reading all of them, but at least he always motivated to read more and more, but the more you crave books, the more books you buy and the more books you read and so on and so forth, so its like a positive feedback loop.
The same can't be said about 2008. Rather, its the complete opposite. A vicious circle.
Where can we start? The Bear Stearns debacle, Jerome Kerviel, the housing market crash, Northern Rock, Bradford & Bingley-Loyds, the 500bn£ bailout, the 700bn$ bad asset plan, Lehman going bust, Merril being bought out, and Citigroup on the brink.
This is a funny video.
"This crisis is not comparable to 1982 banking crisis, the savings and loans crisis of 1986, the portfolio insurance debacle of 1987 , the failure of kidder peabody in 1997 or LTCM in 1998, or the technology bubble of 2000. The crisis is not confined to a particular section of the financial system but has brought the entire system to the brink of breakdown." (Soros 2008)
The stock markets worldwide have lost anything between 10% and 45% of their value, and they are still declinining, with no sign of solid recovery anywhere in site. But to say recovery, is, in my opinion, wrong. Each of the crisis mentioned above, were what you can call bubles, and bubles grow until they burst. The credit crisis, is somewhat of a super-bubble. It's size really was far larger than any other buble. That's really because of two things: deregulation, and greed. One must give the good and the bad sides of things, though. The good thing starts with the beginning of the maturity of the banking system, that in my opinion, we are just beginning to understand what it means "money is a commodity" , and that money is just like raw material, oil etc. Banking, is just like any other industry, a producer, and their product is money. Yet, because money is a lubricant for transactions, and having it is vital, its actual value was greatly inflated that with all this credit derivatives, credit swaps, leveraging, shorting, spreads and all these nitty gritty terms that any financier will throw in your face, was all based on perception. Perceived, or, to a lesser term, estimated value of this product called money, which was, in theory, backed by "real" assets. When spreads for lending reach 40$ against 1$, there must have been some problem with the "product" : money.
When bankers can come up with a financial product within an hour, sell it, break it up, re-package it, re-sell it, at some point, something was bound to go wrong.
And its usually humans that go wrong, not the system, not the markets, and definitely not any electronic trading system.
Economics is not a science, simply because economics has an element of human intervention, which is why it is a social science, when pure science is simply the explanation of natural phenomena. (Now the LSE being a social sciences institution makes a whole lot more sense). Nick Taleb mentioned that bankers have been fooled by randomness in thinking that there actual study of the markets behavior over a certain period, can help them estimate how the market will behave in the future, and bet on that.
This is a nice pic.
I dont say markets are completely unpredictable, but i am not saying they are predictable either. It's just like people, you can have a fairly good estimate about how people will behave, but there is always this X-factor, a black swan, that can negate everything, and as long as people are the ones driving the markets there will always be that element, and the more we give the people in charge this liberty, the higher risk we run on another crash. Crashes will continue to happen, but you dont want another one of this scale, which is why I agree with Mr. Brown on more regulation. Regulation will bring a better understanding of the "money product".
The Germans and the Italians have a fairly good idea on how to build a car, but with a monolith lik GM in trouble of collapse, even well understood legacy products, and how to deal with them, will always remain as an element of risk. Why? Simply because of people. Some people just don't like driving, if you catch my drift.
Anyway, I quote George Soros when I say "History does not repeat itself [at least in finance]. The collapse of the banking system in 1929 was the cause that lead to the Great Depression, and that is why governments will not allow the banking system to collapse."
So, as gloomy as 2008 was, we'll come back, stronger, better, faster. .....I hope!
Sunday, 21 December 2008
Finance for Engineers - The Basic Jargon
I hardly need to explain: trading desks, stock exchanges, papers flying, phones ringing, mice clicking. Its a crazy industry you have to be deranged to understand it. Well, not really. Except if you are Alistair Darling and you just issued the British Government annual budget, but had to review it after the credit mess. Being an engineer, a few "keywords" can help in debugging some terms:
The Basics
Oh yeah, and these are entirely my notes.....or my fault!
The Basics
- Buy Side: People that buy stocks (securities) in order to make a profit, either from dividends or returns. Ex: All kinds of funds: pension funds, holding companies, corporations.
- Sell Side: People that advise the buy side on what to buy, by doing research, expert analysis and coming up with investment ideas. They effectively don't buy the stocks/securities, but rather advise the buy side on what to buy, charging a fee for service, and/or a percentage of the profit. (usually measured in basis points) Ex: Investment banks and brokerage firms.
- Hedge Funds: An institution that holds a bulk of money for very wealthy individuals and/or companies, that allows them to create large scale investments that can yield higher return than individual investments. Hedge funds, unlike mutual funds, are exempt from a number of regulations that allow them to apply more aggressive (yet riskier) investment deals.
- Mutual Funds: An institution that has shareholders, who invest money in that fund, which is run by an investment company. This money is then used to buy or sell shares, bonds or assets (businesses, equity, technology, etc..), according to a set objective, which is the reason the shareholders have invested. Mutual funds, unlike Hedge funds, are governed by rules and regulations against things like monopolies, unfair advantage, business disruption, etc., but on the flip side, are more liquid and shareholders can opt out at any time.<>
- Commercial Banks: A bank in the usual sense where everyone can have an account deposit money and do transactions. Many of the commercial banks (UBS, Chase,Citi), due to immense wealth, create their own Investment banking arm, as well as their own internal funds (because they can!)
- Investment Banks: An investment bank is everything a commercial bank is not. Fewer employees, different operations, and, in most cases, less money. (yep, amazingly so). Investment banks are underwriters, or agents for businesses and corporations issuing securities and stock. i.e. if a company wants to go public, it hires an investment bank to handle it's IPO. Investment banks employee loads of analysts that do alot of market research, to which then the associates and higher ranked employees, advise the investors (funds, corporations, businesses, and in some cases, rich individuals). The investment banks extend their functionality to so many other different areas, such as trading, with trading desks as big as football fields!
- Traders : People who do the actual buying and selling of stocks on behalf of clients. Traders that work on the stock market are required to have a securities trading license (these are the people that throw papers and smoke outside the stock exchange and are constantly on the phone). Traders usually buy and sell in short periods of time to make profit on changing stock prices.
- Brokers: Brokers are intermediaries between buyers and sellers. They also are sales people who would talk to clients and advise them (based on their own, or market research) on what securities to buy and sell, and charging comission.
- Equity: Equity is the value of the securities in a given investor's account assuming that the account is liquidated at the current price. An account can have multiple stocks across industries.
- M&A : Mergers and Acquisitions. Investment banks usually offer companies with advice on whether or not to acquire other companies and/or merge with them. Briefly, and acquisition is when a company buys-out another (usually smaller) company and incorporates its products into its own. The bottom line of an acquisition is that the bought-out company seizes to exist. Employees either become employees of the acquiring company, or are laid off. As for a merger, is when two (or more) companies merge to form a new company, with both businesses remaining servicing their primary business, but with new money, new management and refactoring. The main difference between a merger and acquisition is strategy, that mergers usually introduce strategy changes to the merging parties, while an acquisiton, is because the parent company thought that buying the acquired company fits into its strategy and growth! Merger example: Reuter-Thomson.
- Public Companies: Companies traded on the stock exchange, in which any member of the public can buy shares in that company. The one important issue about public companies is that they are required to release financial and business details to the general public.
- Private Companies: Privately held companies, that do not issue public stock. This frees them from the obligation to release details about the business, beyond what is general information. This makes them like a black box, and to some extent, a competitive advantage. Ex: Bloomberg
- Portfolios: The combination of bonds, stocks , equities etc... held by a person and/or company. A portfolio usually is diversified over a number of industries, and combinations, to minimize risk. (i.e. don't put all your eggs in one basket).
- Revenue: The total return the company made from its operations throughout a fiscal year. i.e. before deduction of tax, expenses, salaries etc...
- Profit: What is left of the revenue after what needs to be paid is paid.
- Dividends: The return of a given stock. The profits of a company are divided on the number of stocks, and paid out to the shareholders, either in cash, or otherwise (goes beyond my scope :))
- Market Cap: The product of the value of an individual share by the total number of shares.
- Income Statement: An income statement is a document that analyzes a company's revenue (not profit) and expenses over a given period of time. In the US, this is usually done on a quarterly basis (i.e. every 3 months).
- Balance Sheet: An overview of a company's financial situation. i.e. what is in red and what is in green. What does the company has in assets (green) and what it has in liabilities (red). The gold equation of a company situation is : Assets = Liabilities + Equity
- News: Anything released by companies to the press - this is directly related to what classifies as public information and private and confidential information- related to insider trading.
- Price to Earnings: a measure of value of a stock. i.e. how much a stock costs compared to its return.
- Estimates: An estimation of the potential earnings of a current investment.
- Stocks - Outstanding/Common: Common stocks issued by the company held by the public and give holders the right to vote and claim to dividends (although the dividends are dependent on the performance of the company).
- Stocks - Preferred : Stocks that do not give the holders voting right, and pay a fixed dividend (if any), regardless of the company performance. (not quite, but this is the general idea)
- Bonds : A bond is basically an "I owe You" document that a government issues to raise money from the people. i.e. Someone can purchase a bond for a certain amount of money, and the government or bond issuer (not always, but usually) promises to pay back the money with interest, either at one specific date, or at set period (frequency) of time. These bonds are themselves tradeable, in which bond holders can sell these bonds before they are due. This is when a bond is sold at a premium. Government bonds are important, because, supposedly, it is zero risk and governments usually pay back the money. i.e. guaranteed money back - an alternative way of investing. (unless the government defaults on it bonds , which happens rarely, but can happen. ex: Russian government defaulted on its bonds in the 90s).
- Analyst: The lower chain of the finance echelon. Analysts (ref. investment banks) are the people who do the grind work of research on companies and businesses.
- Associate: Usually post-MBA employees who are the people that make the investment/brokerage decision based on research done by the analysts.
- Rating Agency: Such as S&P that rate bonds' likelihood of default. (as in bond issuers not paying back the bond).
Oh yeah, and these are entirely my notes.....or my fault!
Friday, 19 December 2008
Street Smarts
I was up to my old habit of wandering around the city, alone with my thoughts. Walking down one of the streets in East London, I notice an attractive young blonde kind of strolling around, except she wasn't exactly walking in a straight line. As I get closer, I relaize that she actually didn't look normal, turning around as if looking for something. Passing by, there was a car with two guys also looking at the blonde with a bit of a surprise. As we both become aware of each other looking at her, I make the gesture and the dude in the car goes "Oh right", as we both realize the woman is obviously on crack, as he almost climbed into the back seat to get a last glimpse of her curves as the car pulled away and I keept walking.....
I keep wondering what it takes to be an entrepreuneur, like the Richard Bransons, the Donald Trumps and the Alan Sugars. I am not talking about the Larry Pages and the Mark Zuckerbergs, or the John Paulsons, Vladimir Potanins, or the Rothschilds , because all those people started from something: The Stanfords and Harvards, or the Politics and the Connections. Am talking about those people who cam from mediocre, or just plain ordinary backgrounds, and made their way, all by themselves, to the top. The husslers, the streak entrepreuneurs, the capitalists. I guess it takes a lot of things, and a shit load of luck, but all these people have one thing in common:
Street smarts.
They say a great salesman can sell t0 water to a fish. These people know all about grass roots- and grass roots is where it all is, because that's where the real hunger starts. It's a jungle out there, and everyone is out to get theirs, and if that's what it takes, get you along the way. It's a competitive world, and in order to survive it, one should know his way around things and people. You can have all the degrees in the world, all the money and all the connections, but to be a player (Billy Harris RIP), you have to be street smart. A street smart person knows how to operate with very little, in a cut-throat environment.
When everyone was a kid, we went through high school. We were all bullied at some point, we got into trouble, we got ratted out, but people survive. Although that's where you start finding your route: some take the bullying and the crap, and stick to the books. Others bully and are on the opposite end, but in the middle you got a few who are a bit of both, the role players. This is when they learn what it means to be on each end, and to survive, they do the talking, the walking, and try to make the best out any situation. In high school, it's all in the open. You know who the nerds are, and you know who the bullies are. You have rules, and you have enforcers. Well identified.
In the real world, this, sadly isn't the case. It's all fair game, and you don't always know who you are playing with. Street smart people can operate in any environment, because, they know how to work the players. It's a business man or a car dealer, they do the sweet talking, they do the bullshiting, they know the math, and they understand the psychic (and if they are good, the women, too). They can lunch it in Hackney or the Bronx tonight, catch the subway to Chez Charles and catch the stretch ride to the Ritz. It's all people, you just have to know who and what the person you are dealing with.
The one thing that defines street smarts, is to be able to think on your feet, literally. Not in the comfort of the boardrom or on a noisy trading floor, but when your wallet was stolen and your phone battery is dead......in the Saudi desert. The street smart, is the dude who can catch a camel ride, dine with the nomads, and find a charger for his phone. What people like Richard Branson can do, is not only that get to that boardroom meeting, but make friends with the nomad, who in some crazy twist of event, can end up being the heir Prince of Arabia, and send some some serious bailout money to one of your credit-crunched companies.
That LSE degree sure is essential in that board meeting, but that means jack all in the desert! That's when street smarts comes into play. The degrees and the money work for alot of cases, but when that no longer does, the street smart man, knows that when they are gone, he still has something to work with, because he has....the grass roots savvy, and knows, that his biggest asset, are the people.
No refs, no rules.........no problem................
Tuesday, 4 November 2008
Sharia Bonds
I have this habit of walking into phone booths. Maybe because I've never actually used one. With a geek phone that almost makes me coffee, why should I? Maybe it's just my burning urge to make station-to-station calls to Alistair Darling, "This is Colonel Lionel Mandrake..."
Anyway, while I was walking on Parliament street, I remembered that a while back, when I was still at the LSE (doesn't time fly?!), I read an article in the FT that the Exchequer were going to issue Sharia bonds, or, in other words, Islam compliant bonds.
First of all, a bit of a background. A bond, is an I-Owe-You paper issued by the government to which certifies that the government owes the holder of the bond a certain amount of money, and that it agrees to pay a given amount of interest once the bond is mature. Mature, as in, when a bond is issued, it's issued over a certain period of time, up to seven years, and when the time is up, the government will pay you back the money with interest. Unlike stocks, bonds, are technically "risk-free" as in, it's highly unlikely that the government will default on the loan. (This is how a spread is calculated: the risk difference between a bond (risk free) and a stock (price changes, may default - bankruptcy).
But, what is important to this post is the interest part, to which, in Islamic law , or Sharia , is not allowed.
Sharia, is the law that governs Islam and how Muslims handle money. According to Sharia, no man can charge a fee just for lending another man a certain amount of money. i.e. interest. Islam preaches that every man has equal rights to do business, as long as there is equal opportunity to everyone, where in a perfect system, every man can either make a profit or loose, or what is called the "Halal" way of doing business. Charging interest, is banned, because technically, when someone gives someone else a loan, that man has to pay him back. If he is also paying an interest for that money, that means the lender is a partner (shareek as ther term is in arabic) in the profits, but not the loss. i.e. It is not an equal opportunity because he always emerges as a profiteer. It is taken to a further level of severity , that charging very high interest (like 10%+ of the loan amount) becomes what is called Ribba in Arabic. i.e. Immoral exploitation of the loaner.
Now, that creates a problem for muslims who may decide to purchase bonds, because they will be making a profit in terms of interest, when the government, basically doesn't loose, and consequently they are making money from money, guarranteed.
Luckily, there is a loophole to this. A bond, is usually backed by an underlying asset. i.e. the cash amount of a bond, technically (but not exactly) can be converted into a certain solid asset, such as gold, land, oil, etc... and a government bond, is backed by the Central Bank, which, is in turn backed by solid assets. Gold the government has, land etcetera. Now, the loophole, is that if these Sharia bonds (called Sukuk in Arabic) are backed by an underlying asset, such as a running business that can, in theory, loose money, so that means there is a possibility of loss.
Although the UK has stalled in issuing these bonds, Indonesia, the largest Islamic country by population (surprised it's not Saudi Arabia or Egypt?) , is leading the way and it has categorized how the Sharia bonds will be structured:
1) “Ijarah” : where the bond is a lease to rent a certain underlying asset.
2) "Mudharabah" : Mudarabah in Arabic means the ability to lower prices to compete in the market, thus sharing the profit.
3) "Musyarakah" : profit and loss sharing.
4) "Istisna" which, in Arabic, means exception, and in the finance context means an exceptional funding to fund a given project.
Regulation Regulation regulation! The one thing probably stalling the issue of these bonds in the United Kingdom, is that our beloved Chancellor isn't too satisfied with the suggested way to regulate them, and the FSA has been summoned to work on that. The issuing of these bonds, will widen the pool of financial products available to Muslims. Although, I guess Mr. Darling, with the cockup the bankers did in the credit shit, isn't being too sloppy with too loose of a regulation.
I personally think that it's not only to capture the local Islamic financial market, but also the global market, estimated at around $500bn. Now the credit crunch has attracted Islamic money, but they do drive a hard bargain. Prince Sultan Bin Nahyan, ruler of the Emirat of Abu Dhabi and co-head of the United Arab Emirates , invested £10 Bn for 30% share of Barclays, in an attempt to bail them out.....
Anyway, I do believe that the Middle East and the Arabs are up an coming when it comes to finance, but as long as they haven't grassped the fact that money is just another commodity like food, oil, wood etc. and interest is just how you make profit from this product, then they still got a long way to go. (Oh shit, did I just implicitly wink at financial derivatives? Ignore please).
I need to go to into a phone booth and call Dr. Strangelove. Enough blabbering.
Anyway, while I was walking on Parliament street, I remembered that a while back, when I was still at the LSE (doesn't time fly?!), I read an article in the FT that the Exchequer were going to issue Sharia bonds, or, in other words, Islam compliant bonds.
First of all, a bit of a background. A bond, is an I-Owe-You paper issued by the government to which certifies that the government owes the holder of the bond a certain amount of money, and that it agrees to pay a given amount of interest once the bond is mature. Mature, as in, when a bond is issued, it's issued over a certain period of time, up to seven years, and when the time is up, the government will pay you back the money with interest. Unlike stocks, bonds, are technically "risk-free" as in, it's highly unlikely that the government will default on the loan. (This is how a spread is calculated: the risk difference between a bond (risk free) and a stock (price changes, may default - bankruptcy).
But, what is important to this post is the interest part, to which, in Islamic law , or Sharia , is not allowed.
Sharia, is the law that governs Islam and how Muslims handle money. According to Sharia, no man can charge a fee just for lending another man a certain amount of money. i.e. interest. Islam preaches that every man has equal rights to do business, as long as there is equal opportunity to everyone, where in a perfect system, every man can either make a profit or loose, or what is called the "Halal" way of doing business. Charging interest, is banned, because technically, when someone gives someone else a loan, that man has to pay him back. If he is also paying an interest for that money, that means the lender is a partner (shareek as ther term is in arabic) in the profits, but not the loss. i.e. It is not an equal opportunity because he always emerges as a profiteer. It is taken to a further level of severity , that charging very high interest (like 10%+ of the loan amount) becomes what is called Ribba in Arabic. i.e. Immoral exploitation of the loaner.
Now, that creates a problem for muslims who may decide to purchase bonds, because they will be making a profit in terms of interest, when the government, basically doesn't loose, and consequently they are making money from money, guarranteed.
Luckily, there is a loophole to this. A bond, is usually backed by an underlying asset. i.e. the cash amount of a bond, technically (but not exactly) can be converted into a certain solid asset, such as gold, land, oil, etc... and a government bond, is backed by the Central Bank, which, is in turn backed by solid assets. Gold the government has, land etcetera. Now, the loophole, is that if these Sharia bonds (called Sukuk in Arabic) are backed by an underlying asset, such as a running business that can, in theory, loose money, so that means there is a possibility of loss.
Although the UK has stalled in issuing these bonds, Indonesia, the largest Islamic country by population (surprised it's not Saudi Arabia or Egypt?) , is leading the way and it has categorized how the Sharia bonds will be structured:
1) “Ijarah” : where the bond is a lease to rent a certain underlying asset.
2) "Mudharabah" : Mudarabah in Arabic means the ability to lower prices to compete in the market, thus sharing the profit.
3) "Musyarakah" : profit and loss sharing.
4) "Istisna" which, in Arabic, means exception, and in the finance context means an exceptional funding to fund a given project.
Regulation Regulation regulation! The one thing probably stalling the issue of these bonds in the United Kingdom, is that our beloved Chancellor isn't too satisfied with the suggested way to regulate them, and the FSA has been summoned to work on that. The issuing of these bonds, will widen the pool of financial products available to Muslims. Although, I guess Mr. Darling, with the cockup the bankers did in the credit shit, isn't being too sloppy with too loose of a regulation.
I personally think that it's not only to capture the local Islamic financial market, but also the global market, estimated at around $500bn. Now the credit crunch has attracted Islamic money, but they do drive a hard bargain. Prince Sultan Bin Nahyan, ruler of the Emirat of Abu Dhabi and co-head of the United Arab Emirates , invested £10 Bn for 30% share of Barclays, in an attempt to bail them out.....
Anyway, I do believe that the Middle East and the Arabs are up an coming when it comes to finance, but as long as they haven't grassped the fact that money is just another commodity like food, oil, wood etc. and interest is just how you make profit from this product, then they still got a long way to go. (Oh shit, did I just implicitly wink at financial derivatives? Ignore please).
I need to go to into a phone booth and call Dr. Strangelove. Enough blabbering.
Thursday, 30 October 2008
Tales from the Basement - Mergers and Acquisitons (1)
There is something about bus stops. Maybe because I often find myself standing at them, alone in the wind, with dim lights, and the wind blowing through my in need-of-a-haircut hair, but they make me think. Usually when I get these thoughts, it's probably remenicing that I am no longer leaning on a lamppost.... (ignore the comment, I just think Ian Angell, my former tutor, 's book "No More Leaning on Lampposts" has a surreal title, and its content is even more interesting).
Anyway, I know a couple of friends of mine that work in M&A, or Mergers and Acquisitions divisions of some leading investment banks. It's like slavery, because these people work the longest hours there is, and call there excel sheet home. I do not really want to know what there actual jobe entails, but my friend, the exotics trader, claims its the most boring and tedious job in the field.
That's there choice, although, I'd like to find out if those M&Aers know what it is like to be on a receiving end of a merger or an acquisition from the client side. They broker and engineer the deal, but once it goes through, they make their cut, and skedadle off, with the clients left to deal with the mess of either merging, incorporating, or integrating the 2 companies that just got M&Ad (nice I should make a t-shirt that says "Smile! you've just been M&A-d).
Well, I am on an integration team for a company that was aquired by another, much larger, company. I'll focus on the tech side for now, rather than the acquisition process, which is buying out the partners, all the outstanding shares, assets etc etc...
The way acquistions usually work, at least in software, is that companies make a strategic build-vs-buy decision once they are looking at usually a 5-year growth/survival/competitivness plan. A company will decide that it needs to offer a certain product or solution, either to gain a competitive advantage, or maintain competitivness within the market it operates. Usually, the second reason is the main reason for an acquisition: the idea already exists in the market, is offered by the major competitors, or a small company offers it, and it is small enough to be acquired. (That small company is usually a spinoff or a venture by someone in the business, who isn't really shooting at becoming a competitor himself, and can sell the idea with a working product and a client base, making a nice bonus when the company is acquired). On the other hand, usually new ideas are built in-house by companies, and existing ideas are only built internally when buying an already existing company-product (interchangeable terms here), is less cost effective.
Which brings us to the main problem, or issues that the i-bankers don't have to deal with, which is integrating the businesses together now that they have been M&A-d, which is one of the situations I am in. We, the mother company, work mainly with C++, which is the cornerstone of our applications framework. Mainly financial databases, market data, stock exchanges - and that's the most I can tell you due to respecting confidentiality! Anyway, the acquisition company operate(d) with Java. I can't say much about the details, but, C++/Java interfacing, especially that these are serious products with a serious code base, that is at least a few years old, are not in the .NET/C#/JVM kind of integration realm, which creates some hoops to jump through to create a seamless experience for the end-user: Be it Java, C++, or Spaghetti Gorgonzola, for the user, it should all be the same speed, same look and feel, same results - everything.
If you work with software, you are probably familiar with the concept of meshing , and we all know how much that can be of a pain. That's why, we , just like many other companies in finance that worked with a wide scope of data formats and forms, have their own internal integration technologies, to create one main interface that all technologies need to integrate to, and that's the main interface that the user interacts with.
It's a tough spot.... Internal technologies are always clunky, clumsy, buggy, because, there are just that many people working on refining them- it's not like open source, with myriads of people working on the infinite use cases a programming language or system may have. But, in finance, two things are prevail:
1) There are too many data sources that you have to have a common platform - a suite that brings everything into one place.
2) Finance institutions have the money to build serious technology in house, and lack the trust to give it to anyone else!
At least that's the technology briefing on M&A, but there is the other managerial side as well: different structure of work, different hierarchies, different corporate culture, different business process, etc etc... that often when an acquisiton is made, there is alot of people shuffling, with people leaving and new people being brought in to join the new kids on the block. (I'll talk about this in another post).
All of that, is not the worry of the M&A dudes......
But, hey, justice comes to some eventually! With all the i-banks feeling the squeeze, some have merged or been bought out by others, and now they can see what it is like to be M&A-d!
Anyway, I know a couple of friends of mine that work in M&A, or Mergers and Acquisitions divisions of some leading investment banks. It's like slavery, because these people work the longest hours there is, and call there excel sheet home. I do not really want to know what there actual jobe entails, but my friend, the exotics trader, claims its the most boring and tedious job in the field.
That's there choice, although, I'd like to find out if those M&Aers know what it is like to be on a receiving end of a merger or an acquisition from the client side. They broker and engineer the deal, but once it goes through, they make their cut, and skedadle off, with the clients left to deal with the mess of either merging, incorporating, or integrating the 2 companies that just got M&Ad (nice I should make a t-shirt that says "Smile! you've just been M&A-d).
Well, I am on an integration team for a company that was aquired by another, much larger, company. I'll focus on the tech side for now, rather than the acquisition process, which is buying out the partners, all the outstanding shares, assets etc etc...
The way acquistions usually work, at least in software, is that companies make a strategic build-vs-buy decision once they are looking at usually a 5-year growth/survival/competitivness plan. A company will decide that it needs to offer a certain product or solution, either to gain a competitive advantage, or maintain competitivness within the market it operates. Usually, the second reason is the main reason for an acquisition: the idea already exists in the market, is offered by the major competitors, or a small company offers it, and it is small enough to be acquired. (That small company is usually a spinoff or a venture by someone in the business, who isn't really shooting at becoming a competitor himself, and can sell the idea with a working product and a client base, making a nice bonus when the company is acquired). On the other hand, usually new ideas are built in-house by companies, and existing ideas are only built internally when buying an already existing company-product (interchangeable terms here), is less cost effective.
Which brings us to the main problem, or issues that the i-bankers don't have to deal with, which is integrating the businesses together now that they have been M&A-d, which is one of the situations I am in. We, the mother company, work mainly with C++, which is the cornerstone of our applications framework. Mainly financial databases, market data, stock exchanges - and that's the most I can tell you due to respecting confidentiality! Anyway, the acquisition company operate(d) with Java. I can't say much about the details, but, C++/Java interfacing, especially that these are serious products with a serious code base, that is at least a few years old, are not in the .NET/C#/JVM kind of integration realm, which creates some hoops to jump through to create a seamless experience for the end-user: Be it Java, C++, or Spaghetti Gorgonzola, for the user, it should all be the same speed, same look and feel, same results - everything.
If you work with software, you are probably familiar with the concept of meshing , and we all know how much that can be of a pain. That's why, we , just like many other companies in finance that worked with a wide scope of data formats and forms, have their own internal integration technologies, to create one main interface that all technologies need to integrate to, and that's the main interface that the user interacts with.
It's a tough spot.... Internal technologies are always clunky, clumsy, buggy, because, there are just that many people working on refining them- it's not like open source, with myriads of people working on the infinite use cases a programming language or system may have. But, in finance, two things are prevail:
1) There are too many data sources that you have to have a common platform - a suite that brings everything into one place.
2) Finance institutions have the money to build serious technology in house, and lack the trust to give it to anyone else!
At least that's the technology briefing on M&A, but there is the other managerial side as well: different structure of work, different hierarchies, different corporate culture, different business process, etc etc... that often when an acquisiton is made, there is alot of people shuffling, with people leaving and new people being brought in to join the new kids on the block. (I'll talk about this in another post).
All of that, is not the worry of the M&A dudes......
But, hey, justice comes to some eventually! With all the i-banks feeling the squeeze, some have merged or been bought out by others, and now they can see what it is like to be M&A-d!
Sunday, 26 October 2008
The Anomaly of Lebanese Banking
Everyone seems to have an identity crisis these days. People seem obsessed about their ancestors and their origin and and...No one seems to come from anywhere anymore, but the more of a fruit salad you are, the more interesting of a person.
I am Lebanese.
Ok, I am a bit of a fruit salad,I speak with a slight American accent, grew up trilingual, at home we celebrate every religious occasion there is (we almost celebrated festivus, and we are not even religious!) , my mom is English, my dad spent most of his life in Germany, and my immediate family is scattered along 4 continents, and I don't even look Lebanese. But I am, and I am proud to be! Why would I want to be proud of a country that's historically known for its struggles and their inability to agree on a single thing?!
Well, our banking system for one.
Lebanon's banking system has been the rock of our country, and if we had an economy, it would be it's cornerstone. Lebanese people (like the Jews) are very good at math , and people networking. Now if that's not spelling out F-I-N-A-N-C-E, I don't know what is. Whether locally or abroad , Lebanese people have excelled in the financial industry, to amazing levels. For our small country, Lebanese people have achieved considerable heights, but when it comes to money, we are in a class of ourselves (at least if you measure against the relative population) that unlike other domains where alot of us Lebanese excel outside the country, when it comes to finance, we excel both at home and abroad. London and New York, stink with Lebanese financiers, and Dubai, is literally there playgroung, but I am not talking about that.
Lebanon, was one of the few, if not the only, country whose banking system was not hit by the credit crunch. In fact, Lebanese banks, have made better than average profits during this period.
BLOM Bank and Audi Saradar, with Byblos bank not too far behind, have actually made record profits. BLOM, the biggest bank by deposits, has seen a 34% rise in its profits in the first 3 quarters of 2008. These three banks, are publicly listed on the Beirut Stock Exchange and would be equivalent to a AAA class stocks in the West. They are leading stocks, i.e. stocks that set the pace for the stock exchange index (gaining or loosing) , alongside Solidere, which is the other leading stock. Now, Solidere, is the development company for downtown Beirut area, in terms of construction. And it's a leading stock, as the housing market, and especially, the real-estate market in Lebanon, is booming, and sky-scrappers and high rise buildings are springing up in Beirut like there is no tomorrow. (If you don't believe me, ask Donald Trump, he's invested in Lebanon - well his ex-wife at least).
The Lebanese state, is the only state besides Switzerland, that has a banking-secrecy law. In fact, it's even harder for public authorities to get access to financial information regarding a certain individual in Lebanon, than it is to get it from a Swiss bank (true story - go ahead and try). If this is not an enough reason for UHNW individuals to move money to Lebanese banks, with all the commossion in the West, Lebanon is a very elegant and attractive place for Gulf Oil money. So much, that back in 2006, there was more deposits in Lebanon ($80bn) than there was in Kuwait ($75bn) , an oil producing country. (That's running accounts that is- which is possibly the closest you can get to the real information) What is held by the private (such as Saradar Private bank, part of the Audi Saradar group), investment , and asset management divisions, of these banks, is almost like massive hedge funds, where the banks have no obligation of releasing information about their investors. I know for a fact, that alot of oil money, sits in Lebanon.
If you don't believe me, well, get a load of this. US Hedge funds, are moving money into Lebanon, and it was reported by the New York Times. It's not me blaberring. But maybe, that's because our central bank forbid banks from getting into derivatives 3 years ago.Seems like a smart move, from Riad Salameh, our CB Governor, who won the World's Best Central Bank Government award by Euromoney in 2006- Mervin King take notice! We are not short of economists in our government either, with former minister of Economy Fouad Siniora heading the government cabinet as PM after long serving as Economy and Finance minister in all of slain Prime Minster Rafik Hariri's cabinets, with his deputy, Jihad Azour , now serving as Finance and Economy minister. (Now the Gordon Brown-Alistair Darling similarity is ridiculous!)
There are more banks, (58 banks as of October 2008) than there are banks in half the western countries, and almost as many banks as in Germany, the world's third biggest economy. Ok , am not comparing us with Germany, (Lebanon being the 77th economy in the world in GDP) , but well, with 4.5 million people in one country, that's one bank for less than 100,000 people. I still don't get it, but it works. At least Robert Fisk thinks so!
But the way I really know, is that, well, my friend works in the IT department at BLOMInvest, the investment arm of BLOM bank, and well, he said, in all the software they develop, they use "long integers", and have to support 12 digit numbers, in all applications.
That's alot of zeros.............and that's excluding the two zeros to the right of the decimal point!
I am Lebanese.
Ok, I am a bit of a fruit salad,I speak with a slight American accent, grew up trilingual, at home we celebrate every religious occasion there is (we almost celebrated festivus, and we are not even religious!) , my mom is English, my dad spent most of his life in Germany, and my immediate family is scattered along 4 continents, and I don't even look Lebanese. But I am, and I am proud to be! Why would I want to be proud of a country that's historically known for its struggles and their inability to agree on a single thing?!
Well, our banking system for one.
Lebanon's banking system has been the rock of our country, and if we had an economy, it would be it's cornerstone. Lebanese people (like the Jews) are very good at math , and people networking. Now if that's not spelling out F-I-N-A-N-C-E, I don't know what is. Whether locally or abroad , Lebanese people have excelled in the financial industry, to amazing levels. For our small country, Lebanese people have achieved considerable heights, but when it comes to money, we are in a class of ourselves (at least if you measure against the relative population) that unlike other domains where alot of us Lebanese excel outside the country, when it comes to finance, we excel both at home and abroad. London and New York, stink with Lebanese financiers, and Dubai, is literally there playgroung, but I am not talking about that.
Lebanon, was one of the few, if not the only, country whose banking system was not hit by the credit crunch. In fact, Lebanese banks, have made better than average profits during this period.
BLOM Bank and Audi Saradar, with Byblos bank not too far behind, have actually made record profits. BLOM, the biggest bank by deposits, has seen a 34% rise in its profits in the first 3 quarters of 2008. These three banks, are publicly listed on the Beirut Stock Exchange and would be equivalent to a AAA class stocks in the West. They are leading stocks, i.e. stocks that set the pace for the stock exchange index (gaining or loosing) , alongside Solidere, which is the other leading stock. Now, Solidere, is the development company for downtown Beirut area, in terms of construction. And it's a leading stock, as the housing market, and especially, the real-estate market in Lebanon, is booming, and sky-scrappers and high rise buildings are springing up in Beirut like there is no tomorrow. (If you don't believe me, ask Donald Trump, he's invested in Lebanon - well his ex-wife at least).
The Lebanese state, is the only state besides Switzerland, that has a banking-secrecy law. In fact, it's even harder for public authorities to get access to financial information regarding a certain individual in Lebanon, than it is to get it from a Swiss bank (true story - go ahead and try). If this is not an enough reason for UHNW individuals to move money to Lebanese banks, with all the commossion in the West, Lebanon is a very elegant and attractive place for Gulf Oil money. So much, that back in 2006, there was more deposits in Lebanon ($80bn) than there was in Kuwait ($75bn) , an oil producing country. (That's running accounts that is- which is possibly the closest you can get to the real information) What is held by the private (such as Saradar Private bank, part of the Audi Saradar group), investment , and asset management divisions, of these banks, is almost like massive hedge funds, where the banks have no obligation of releasing information about their investors. I know for a fact, that alot of oil money, sits in Lebanon.
If you don't believe me, well, get a load of this. US Hedge funds, are moving money into Lebanon, and it was reported by the New York Times. It's not me blaberring. But maybe, that's because our central bank forbid banks from getting into derivatives 3 years ago.Seems like a smart move, from Riad Salameh, our CB Governor, who won the World's Best Central Bank Government award by Euromoney in 2006- Mervin King take notice! We are not short of economists in our government either, with former minister of Economy Fouad Siniora heading the government cabinet as PM after long serving as Economy and Finance minister in all of slain Prime Minster Rafik Hariri's cabinets, with his deputy, Jihad Azour , now serving as Finance and Economy minister. (Now the Gordon Brown-Alistair Darling similarity is ridiculous!)
There are more banks, (58 banks as of October 2008) than there are banks in half the western countries, and almost as many banks as in Germany, the world's third biggest economy. Ok , am not comparing us with Germany, (Lebanon being the 77th economy in the world in GDP) , but well, with 4.5 million people in one country, that's one bank for less than 100,000 people. I still don't get it, but it works. At least Robert Fisk thinks so!
But the way I really know, is that, well, my friend works in the IT department at BLOMInvest, the investment arm of BLOM bank, and well, he said, in all the software they develop, they use "long integers", and have to support 12 digit numbers, in all applications.
That's alot of zeros.............and that's excluding the two zeros to the right of the decimal point!
Monday, 13 October 2008
UK Bailout vs. US Rescue Package - Part 1
A good friend of mine, is one of my secret voices when it comes to finance, and I get alot of insight from him. Nick Taleb (I am pissing him off by calling him Nick, but well, you think he is the only one who can take the piss?) when he wrote his book Fooled by Randomness, in which he ruminates on his view on Finance and the markets, he mentioned that his book was the fruit of lengthy conversations into the night with one Jamil Baz, a well known professor of financial mathematics, who is now at the University of Oxford. Well, many of my posts, notably the ones on finance (I am solely to blame for the technology posts ) are also the result of exhaustive (and often satirical) conversations with my friend, who, is also a financial mathematician....
I may not be a Nick Taleb, sure, and I may not be (yet) and advocate of Karl Popper, but well, I did go to the LSE, to which Karl Popper was a famed philosopher. (Maybe you heard of George Soros? One of his disciples). Well, I am a disciple of Ian Angell, and one of his original New Barbarians, so, there might be some similarities.
Anyway, I was debating with my friend the difference between the UK bailout of £500 Billion to the Fed's $700 Bn rescue package.
They are fundamentally different.
The US Rescue package, to which was first rejected by congress, sending the markets into more turmoil and ever more decline, isn't exactly about the banks per say, but rather, buying out the bad mortgages, which is the source of the problem for the crisis. The housing market in the USA is crashing, and its taking down the whole economy with it. Now, I did mention this in a previous post, but, well, the banks were too loose on giving out mortgages overvaluing the houses which subsequently dropped into a sub-prime value, even less than the initial price. So, the banks are the ones to carry the loss. That is the cancer, because, the more the subprime crisis deepens, the lower the house prices will fall, making it a very vicious cycle, because the more house prices fall, the more banks will incur losses. So, what is the Fed doing with the $700bn? They are going to buy all these bad mortgages. The government, can sustain buying these mortgages at a loss, because, well, when it does buyout all the mortgages, it stops the domino effect, and kills the cancer. i.e. because the government, technically , can't go into a "liquidity" crisis per say, and won't need to sell off any of its assets, to stay afloat. (This is not exactly true, but lets just assume- no need to get into political economics).
So, that means that the government can just sit on these bad mortgages until the market recovers, and the value of these assets goes back to normal. The smart (and counterintuitive) thing about this, is that this move in itself, is the cause to stop the market from crashing, and will eventually drive the value of the houses back up and the government can re-sell them.
Cause and effect. I love Adam Smith. The UK bailout, although, is a different thing.
I may not be a Nick Taleb, sure, and I may not be (yet) and advocate of Karl Popper, but well, I did go to the LSE, to which Karl Popper was a famed philosopher. (Maybe you heard of George Soros? One of his disciples). Well, I am a disciple of Ian Angell, and one of his original New Barbarians, so, there might be some similarities.
Anyway, I was debating with my friend the difference between the UK bailout of £500 Billion to the Fed's $700 Bn rescue package.
They are fundamentally different.
The US Rescue package, to which was first rejected by congress, sending the markets into more turmoil and ever more decline, isn't exactly about the banks per say, but rather, buying out the bad mortgages, which is the source of the problem for the crisis. The housing market in the USA is crashing, and its taking down the whole economy with it. Now, I did mention this in a previous post, but, well, the banks were too loose on giving out mortgages overvaluing the houses which subsequently dropped into a sub-prime value, even less than the initial price. So, the banks are the ones to carry the loss. That is the cancer, because, the more the subprime crisis deepens, the lower the house prices will fall, making it a very vicious cycle, because the more house prices fall, the more banks will incur losses. So, what is the Fed doing with the $700bn? They are going to buy all these bad mortgages. The government, can sustain buying these mortgages at a loss, because, well, when it does buyout all the mortgages, it stops the domino effect, and kills the cancer. i.e. because the government, technically , can't go into a "liquidity" crisis per say, and won't need to sell off any of its assets, to stay afloat. (This is not exactly true, but lets just assume- no need to get into political economics).
So, that means that the government can just sit on these bad mortgages until the market recovers, and the value of these assets goes back to normal. The smart (and counterintuitive) thing about this, is that this move in itself, is the cause to stop the market from crashing, and will eventually drive the value of the houses back up and the government can re-sell them.
Cause and effect. I love Adam Smith. The UK bailout, although, is a different thing.
Monday, 29 September 2008
The English Budget
Now don't you just love the English? They have their peculiarities - the two faucets, driving on the right side etc- but, in my personal opinion, I think those peculiarities, fundamentally, come from a very old culture, a culture of a country that doesn't have an independence day, and has never been occupied for over a thousand years. Tradition, or the way the English go about their business, is deeply rooted in the culture, even if most of the people are unaware of these qualities. Some people refer to the Englishman's "indiferrence" to life, I'd rather think of it as "deep understanding of life." I particularly admire the English's ability of self ridicule, and who better than the Greatest Englishman to put it best, than Mr. Winston Churchill.
"If Hitler invaded hell I would make at least a favorable reference to the devil in the House of Commons. "
Those peculiarities, in my opinion, are a sublime way of outlining the importance of certain things, and I discovered today, that Alistair Darling, our notorious Chancellor of the Exchequer, who, now is the man calling the shots in the banking sector after nationalizing a number of banks, like the Royal Bank of Scotland, once the 5th largest bank in the world in assets, today is 60% nationalized. Based on the UK bailout of £500Bn , and with the British government leading by example, with the EU and the US structuring similar bailouts, it seems Mr. Darling is the leading figure to be the savior of the world economy, even if this will only be proven by history.
Anyway, the economy, should be the focal point of any government, and back to those "peculiarities", that's how the English show how truly they believe that. Get this:
The Chancellor, delivering his Budget, is the only person allowed to drink alcohol in the Chamber.
Now, personally, I think this is a recognition of the importance of the man's job, and how important it. is. Although the funny thing about this year's budget, is that the only man allowed to drink in the chamber, has imposed higher taxes on alcohol.
Deliciously English sarcasm.
Anyway, the British are the ones who invented Value Added Tax (VAT) , which, in simple terms, instead of taxing every entity and middle man between producer and consumer- just tax the end product- i.e. impose the tax on the goods being sold, and let the consumer pay the tax. This may sound a little counter intuitive, but actually this will cause companies and producers to cut their prices. Why, because, well, the government, to encourage businesses and help them flourish, will lower their tax the more business and production they make. But the money has to come from somewhere, so, just tax the consumer. The consumer anyway is the one using most of the government service, and well, what difference does it make as long as the price stays the same? i.e. By moving the tax from producer to consumer, the government helped the economy grow, but by keeping (or increasing slightly) the money it gets from tax. That's also a similar strategy to the never ending debate that rich people seem to pay less taxes on average, and that if people have more money and liquidity, they will tend to invest more, and the money will be re-invested in the economy.
They don't do that. They move to sunny countries. So, My darling Alistair, creates more stealth taxes for me to pay at the pub.
"If Hitler invaded hell I would make at least a favorable reference to the devil in the House of Commons. "
Those peculiarities, in my opinion, are a sublime way of outlining the importance of certain things, and I discovered today, that Alistair Darling, our notorious Chancellor of the Exchequer, who, now is the man calling the shots in the banking sector after nationalizing a number of banks, like the Royal Bank of Scotland, once the 5th largest bank in the world in assets, today is 60% nationalized. Based on the UK bailout of £500Bn , and with the British government leading by example, with the EU and the US structuring similar bailouts, it seems Mr. Darling is the leading figure to be the savior of the world economy, even if this will only be proven by history.
Anyway, the economy, should be the focal point of any government, and back to those "peculiarities", that's how the English show how truly they believe that. Get this:
The Chancellor, delivering his Budget, is the only person allowed to drink alcohol in the Chamber.
Now, personally, I think this is a recognition of the importance of the man's job, and how important it. is. Although the funny thing about this year's budget, is that the only man allowed to drink in the chamber, has imposed higher taxes on alcohol.
Deliciously English sarcasm.
Anyway, the British are the ones who invented Value Added Tax (VAT) , which, in simple terms, instead of taxing every entity and middle man between producer and consumer- just tax the end product- i.e. impose the tax on the goods being sold, and let the consumer pay the tax. This may sound a little counter intuitive, but actually this will cause companies and producers to cut their prices. Why, because, well, the government, to encourage businesses and help them flourish, will lower their tax the more business and production they make. But the money has to come from somewhere, so, just tax the consumer. The consumer anyway is the one using most of the government service, and well, what difference does it make as long as the price stays the same? i.e. By moving the tax from producer to consumer, the government helped the economy grow, but by keeping (or increasing slightly) the money it gets from tax. That's also a similar strategy to the never ending debate that rich people seem to pay less taxes on average, and that if people have more money and liquidity, they will tend to invest more, and the money will be re-invested in the economy.
They don't do that. They move to sunny countries. So, My darling Alistair, creates more stealth taxes for me to pay at the pub.
Sunday, 28 September 2008
JP Morgan , the IBM of finance
I was lucky today, that while coming back from my best friend's , knackered like it was a day out of college.... On the tube, I found a copy of the Financial Times Weekend edition lingering about. I figured maybe it was some Lehman or Merril employee who, after flipping through it, got so disgusted and said fuck it!
I don't mind picking up the crumbs.
It usually works for Warren Buffet. He has done it time and time before. He did it with LTCM in 1998, and now he did it with Goldman Sachs. The mighty GS are now a commercial bank, as we bid farewell to the era of the glory days of investment banking as we know it (or don't know it, as no one seems to know what the fuck is going on). Sadly, Morgan Stanley , who is full of brilliant Lebanese financiers such as CEO John J. Mack, and co-president Walid Chammah , among many others, also had to switch to the more regulated, tighter commercial banking sector, so the Federal Reserve can have their back. (I think the Fed can be renamed F'ed at the moment). Anyway, Warren Buffet took a $5 billion stake in Goldman , to save it from crumbling.
The other news that JP Morgan has swooped in to buy Washington Mutual , which was the biggest savings and loans bank in the USA. JP got them for a mere $ 1.9 Billion, which is pretty cheap considering. WaMu 's collapse was the largest bank failure in US history. (Which reminds me, the Northern Rock saga was the first run on a bank in the UK for 140 years - and in 2008, we almost had two, as Bradford & Bingley seems to be in a pile of shite).
I can see what JP is doing.
JP Morgan Chase, is now the biggest bank in the United States by far. What I think one of the strategies of Jamie Dimon, is to make JP so massive, that it just can't fail. It becomes such a behemoth, that it is so diverse and massive of a company, that it just can't go bust. It's the IBM effect. These behemoth companies, although can go into difficulties, are so large, that they become able to evolve as businesses. i.e. IBM, 20 years ago, was mainly a hardware company, yet, today, 54% of IBM's revenue comes from software and services, and its PC division, the same division responsible for the PC revolution of the 80s, and the key behind the rise of Microsoft (history note: When IBM started selling PCs left and right, it forced its consumers to purchase MS-DOS, which was Microsoft's flagship operating system at the time (now also known as Dummy OS), and Microsoft made millions out of royalties, which Bill Gates, no matter how much people hate him, mad a shrewd business decision to invest in R&D, and mainly in Graphical User Interfaces (GUIs) ). The strategy anyway seems to be working, and after buying out Bear Stearns, now they bought WaMu, and are well on the way of become one of the pillars of the US economy - the IBM of the financial industry. Just too big to fall.......
Check this picture i found:
[Source: Wikipedia article]
Now why do I have this urge of saying "Hi, and welcome to Goldman Sachs telephone banking. I am Tina and how can I help you today?" hehe.
I don't mind picking up the crumbs.
It usually works for Warren Buffet. He has done it time and time before. He did it with LTCM in 1998, and now he did it with Goldman Sachs. The mighty GS are now a commercial bank, as we bid farewell to the era of the glory days of investment banking as we know it (or don't know it, as no one seems to know what the fuck is going on). Sadly, Morgan Stanley , who is full of brilliant Lebanese financiers such as CEO John J. Mack, and co-president Walid Chammah , among many others, also had to switch to the more regulated, tighter commercial banking sector, so the Federal Reserve can have their back. (I think the Fed can be renamed F'ed at the moment). Anyway, Warren Buffet took a $5 billion stake in Goldman , to save it from crumbling.
The other news that JP Morgan has swooped in to buy Washington Mutual , which was the biggest savings and loans bank in the USA. JP got them for a mere $ 1.9 Billion, which is pretty cheap considering. WaMu 's collapse was the largest bank failure in US history. (Which reminds me, the Northern Rock saga was the first run on a bank in the UK for 140 years - and in 2008, we almost had two, as Bradford & Bingley seems to be in a pile of shite).
I can see what JP is doing.
JP Morgan Chase, is now the biggest bank in the United States by far. What I think one of the strategies of Jamie Dimon, is to make JP so massive, that it just can't fail. It becomes such a behemoth, that it is so diverse and massive of a company, that it just can't go bust. It's the IBM effect. These behemoth companies, although can go into difficulties, are so large, that they become able to evolve as businesses. i.e. IBM, 20 years ago, was mainly a hardware company, yet, today, 54% of IBM's revenue comes from software and services, and its PC division, the same division responsible for the PC revolution of the 80s, and the key behind the rise of Microsoft (history note: When IBM started selling PCs left and right, it forced its consumers to purchase MS-DOS, which was Microsoft's flagship operating system at the time (now also known as Dummy OS), and Microsoft made millions out of royalties, which Bill Gates, no matter how much people hate him, mad a shrewd business decision to invest in R&D, and mainly in Graphical User Interfaces (GUIs) ). The strategy anyway seems to be working, and after buying out Bear Stearns, now they bought WaMu, and are well on the way of become one of the pillars of the US economy - the IBM of the financial industry. Just too big to fall.......
Check this picture i found:
[Source: Wikipedia article]
Now why do I have this urge of saying "Hi, and welcome to Goldman Sachs telephone banking. I am Tina and how can I help you today?" hehe.
Sunday, 21 September 2008
Saudi Stock Market crash
I am a big fan of Eagle-Eye Cherry. One of his songs has the title "Been here once before", and with the markets around the world, well, notably the US and European markets mainly, who seemingly recovered on Friday, (if you call recovering from the worst crash since the 1929 depression a recovery) crashing significantly, this reminds me of the stock market crash in Saudi Arabia in 2006.
Allow me to quote Robert Gilpin from his book Global Political Economy "...greed is the only human trait found to be insatiable." Well, Wall Street or Tadawol boil down to the same thing in my opinion: Greed. Today's crash is mainly because of sub-prime mortgage loans and derivatives, and the Saudi Arabian crash was because of over-enthusiastic middle class investors and the greed of the Ultra-High Net Worth Individuals (UHNWI), that bloated stock values to exploit the very young, and very immature Saudi Market.
Here is how Tadawul looked in 2006 around the fourth quarter of the fiscal year.
Ed, from whom I borrowed the above chart, has a better explanation in his Daily Dose of Optimism. I am just shedding light on the similarities of markets, even if they are in the Middle East, which is considered a young market. (I foresee a post on Shari'a bonds coming at one point!) as Arabs, especially us Lebanese, have been traders for centuries. Anyway....
A good friend of mine, of whom I graduated almost at the same time from university in Beirut, invested $10K in the KSA stock market, and he almost cashed in, as it rose up 35%, only to see it then crash by 50%, and he ended in a loss. Since he was my classmate, you can imagine that he wasn't a big time investor, and he was maybe looking to make some fast cash so he could get married to his college sweetheart (whom he eventually broke up with - talk about crashes!) . So was the case of hundreds of others in Riyadh. The trick about KSA is that betting is illegal, and it seems that for ordinary Saudis, it has become the new pass time, more like obsession.
My friend didn't sell but figured the market will bounce back, yet, this was just a market correction, and stocks had deflated back to their normal price.
Fast forward to 2008, and I think N. Taleb would like me when I call all these financial reporters stupid, when they misuse his term "Black Swan". I hate it when people throw around buzz words that they don't know what they mean. What is happening today is NOT a black swan: Although the markets are crashing and there are alot of similarities to 1998 , when LTCM went down, it's not the same, and it's much worse. A black swan is when something unforseen, and unpredictable happens. What started the fall of LTCM is when the Russian government defaulted on it's bonds, triggering a liquidity issue. The sub-prime mortgage isn't unexpected, it's based on bad decisions and spiralling calculations by the banks, which was seen coming since a few months. NOT a black swan.
Here is how the Dow index looks like today:
This is due to a culminating problem, the sub-prime mortgage. In a nutshell, when markets were healthy, and banks felt happy, they became too easy with their lending, notably when giving out mortgage loans. So, here is how it goes: the bank valuates a house at lets say, $500k, and they give out a loan for 600k$. The housing market prices at the time were soaring, so, in case the home owner couldn't pay out his mortgage, then the bank would sell the house which was now valued more than 600k - that is if markets kept going up- thus the bank ends up making a profit AND getting there money back.
There is a catch.
When homeowners started taking bigger loans, which of course incurred bigger interests, they figured after a while, that not only was it too high of an interest for them, but they also didn't need that bigger house anyway! (Greed again) So, they did the obvious, and sold the house. One by one, people started selling houses, and the house prices dropped. So, the house that cost 500k, now cost 450k. The banks, instead of making a premium,ended up with a loss. The house sold at a sub-prime price. In some other post, once things clear up more and more, I may try to explain to myself how this packaging and re-packaging of these losses by the I-banks, got them to the second chart above.
The parallelism between the market today, and the Saudi market in 2006 ,the ordinary man who thought that he could get a good deal and improve his life: house, marriage, etc., because money was abundant and so easy to get, sent us all tumbling down. Blame the banks, because well , they are the one doing the lending, and well, if the pie looks big, everyone wants a bigger piece.
That is called greed......and they'll just do it again.
Allow me to quote Robert Gilpin from his book Global Political Economy "...greed is the only human trait found to be insatiable." Well, Wall Street or Tadawol boil down to the same thing in my opinion: Greed. Today's crash is mainly because of sub-prime mortgage loans and derivatives, and the Saudi Arabian crash was because of over-enthusiastic middle class investors and the greed of the Ultra-High Net Worth Individuals (UHNWI), that bloated stock values to exploit the very young, and very immature Saudi Market.
Here is how Tadawul looked in 2006 around the fourth quarter of the fiscal year.
Ed, from whom I borrowed the above chart, has a better explanation in his Daily Dose of Optimism. I am just shedding light on the similarities of markets, even if they are in the Middle East, which is considered a young market. (I foresee a post on Shari'a bonds coming at one point!) as Arabs, especially us Lebanese, have been traders for centuries. Anyway....
A good friend of mine, of whom I graduated almost at the same time from university in Beirut, invested $10K in the KSA stock market, and he almost cashed in, as it rose up 35%, only to see it then crash by 50%, and he ended in a loss. Since he was my classmate, you can imagine that he wasn't a big time investor, and he was maybe looking to make some fast cash so he could get married to his college sweetheart (whom he eventually broke up with - talk about crashes!) . So was the case of hundreds of others in Riyadh. The trick about KSA is that betting is illegal, and it seems that for ordinary Saudis, it has become the new pass time, more like obsession.
My friend didn't sell but figured the market will bounce back, yet, this was just a market correction, and stocks had deflated back to their normal price.
Fast forward to 2008, and I think N. Taleb would like me when I call all these financial reporters stupid, when they misuse his term "Black Swan". I hate it when people throw around buzz words that they don't know what they mean. What is happening today is NOT a black swan: Although the markets are crashing and there are alot of similarities to 1998 , when LTCM went down, it's not the same, and it's much worse. A black swan is when something unforseen, and unpredictable happens. What started the fall of LTCM is when the Russian government defaulted on it's bonds, triggering a liquidity issue. The sub-prime mortgage isn't unexpected, it's based on bad decisions and spiralling calculations by the banks, which was seen coming since a few months. NOT a black swan.
Here is how the Dow index looks like today:
This is due to a culminating problem, the sub-prime mortgage. In a nutshell, when markets were healthy, and banks felt happy, they became too easy with their lending, notably when giving out mortgage loans. So, here is how it goes: the bank valuates a house at lets say, $500k, and they give out a loan for 600k$. The housing market prices at the time were soaring, so, in case the home owner couldn't pay out his mortgage, then the bank would sell the house which was now valued more than 600k - that is if markets kept going up- thus the bank ends up making a profit AND getting there money back.
There is a catch.
When homeowners started taking bigger loans, which of course incurred bigger interests, they figured after a while, that not only was it too high of an interest for them, but they also didn't need that bigger house anyway! (Greed again) So, they did the obvious, and sold the house. One by one, people started selling houses, and the house prices dropped. So, the house that cost 500k, now cost 450k. The banks, instead of making a premium,ended up with a loss. The house sold at a sub-prime price. In some other post, once things clear up more and more, I may try to explain to myself how this packaging and re-packaging of these losses by the I-banks, got them to the second chart above.
The parallelism between the market today, and the Saudi market in 2006 ,the ordinary man who thought that he could get a good deal and improve his life: house, marriage, etc., because money was abundant and so easy to get, sent us all tumbling down. Blame the banks, because well , they are the one doing the lending, and well, if the pie looks big, everyone wants a bigger piece.
That is called greed......and they'll just do it again.
Tuesday, 16 September 2008
Manic Monday and the size of the US economy
I was lucky enough today to listen to the Underground Philosopher on my way home on the district line. For those who have not had the chance to listen to him, a District line driver is nicknamed "The philosopher" because he often makes comments or dishes out advice while making his "mind the gap" announcement. Hilarious, yet surprisingly today, he made no comment on the financial crisis. It seems people really don't get the magnitude of the crisis. I tried to pickup a copy of the Financial Times this morning, but it was obviously sold out. I didn't want it for the information, I got a big information terminal at my disposal, but I really wanted for sentimental value. I had to settle for a copy of The Guardian, but, being a leftist - a social capitalist to be exact - it wasn't a big loss. Although, what also struck me, is the lady at the counter, who, when she told me it was sold out, she asked : "what does it have? Jobs?" and I said "No, loosing jobs." This is supposedly "Manic Monday" , although I was disappointed that no one jumped from the Lehman building in Canary Wharf. Maybe they should throw Richard Fuld , in a "thrown out of a strip club" manner. Would make my best friend happy...
Anyway, people seem to be missing the point. Not long ago, I was discussing the idea that the balance of power is shifting East. True, although, it won't be happening as fast, nor will it be a smooth transition. That lady at the news stand, works in a shop next to Burger King, one of the symbols of America, the hamburger.
I'll cut to the chase.
Three hundred million US citizens, still consume more than 1.3 billion Chinese people. The world economy , is overall, revolving around consumption. i.e. Oil (I hate using this word, because it is the least of our worries) , heavy industries, transport, etc... all these are working towards the same goal : the burger eater. I say burger eater in reference to two things : 1. Burger eater as in the consumer, who, to eat his burger, will need to wear clothes, drive a car, live in a house, before he could get to his burger. 2. I specifically call him burger eater, because, although we are all "eaters" or consumers, Burger eaters - Americans - are the biggest consumers. Again, I may be using the KISS principle loosely, but, as long as that "burger eater" is still the focal point of the world economy, the balance won't shift, and it won't be even starting to shift, for the next 5-10 years. I can't imagine what will happen, but the idea of having "Curry King" and "Rice Man" at every corner, scares me. ( I have bad aptitude to spicy food - except when drunk). More on mass consumerism soon - hey, it's directly related to the Middle Easy - booya!
I got bad news for Europe though. The balance will shift, but it won't be shifting gradually, but rather it will jump right over the old continent to Asia. Keep out alcoholism out of the equation, the Europeans simply don't have the numbers nor the consuming capacity to compete with the Americans, and they are more likely to shrink in numbers than get anywhere near the nine digit number of people. Anyway, I believe in history, and they had their turn in the rota.
But why the financial crisis will bite us in the ass hard for the few coming years? Well, the economy of the United States is , if not already there, at the verge of recession. If the Americans stop being able to pay for those burgers, well, imagine every McDonalds and Burger King in the world closed down. That's how its going to affect the common man, everywhere in the world. Think of it this way, you are coming home, drunk and hungry, and there is no McDonalds open to service you. Until those Curry Kings start springing up and staying open 24 hours, we all going to have really bad hangovers.
If you're a Londoner or a New Yorker, you'll get what I am saying....and those are the world's financial centres (at least for now).
Anyway, people seem to be missing the point. Not long ago, I was discussing the idea that the balance of power is shifting East. True, although, it won't be happening as fast, nor will it be a smooth transition. That lady at the news stand, works in a shop next to Burger King, one of the symbols of America, the hamburger.
I'll cut to the chase.
Three hundred million US citizens, still consume more than 1.3 billion Chinese people. The world economy , is overall, revolving around consumption. i.e. Oil (I hate using this word, because it is the least of our worries) , heavy industries, transport, etc... all these are working towards the same goal : the burger eater. I say burger eater in reference to two things : 1. Burger eater as in the consumer, who, to eat his burger, will need to wear clothes, drive a car, live in a house, before he could get to his burger. 2. I specifically call him burger eater, because, although we are all "eaters" or consumers, Burger eaters - Americans - are the biggest consumers. Again, I may be using the KISS principle loosely, but, as long as that "burger eater" is still the focal point of the world economy, the balance won't shift, and it won't be even starting to shift, for the next 5-10 years. I can't imagine what will happen, but the idea of having "Curry King" and "Rice Man" at every corner, scares me. ( I have bad aptitude to spicy food - except when drunk). More on mass consumerism soon - hey, it's directly related to the Middle Easy - booya!
I got bad news for Europe though. The balance will shift, but it won't be shifting gradually, but rather it will jump right over the old continent to Asia. Keep out alcoholism out of the equation, the Europeans simply don't have the numbers nor the consuming capacity to compete with the Americans, and they are more likely to shrink in numbers than get anywhere near the nine digit number of people. Anyway, I believe in history, and they had their turn in the rota.
But why the financial crisis will bite us in the ass hard for the few coming years? Well, the economy of the United States is , if not already there, at the verge of recession. If the Americans stop being able to pay for those burgers, well, imagine every McDonalds and Burger King in the world closed down. That's how its going to affect the common man, everywhere in the world. Think of it this way, you are coming home, drunk and hungry, and there is no McDonalds open to service you. Until those Curry Kings start springing up and staying open 24 hours, we all going to have really bad hangovers.
If you're a Londoner or a New Yorker, you'll get what I am saying....and those are the world's financial centres (at least for now).
Monday, 15 September 2008
Lehman Brothers bites the dust
Working and living in London, you undergo a daily abuse of your health, both mental and physical, and while I was walking back home ( I live in Bow, ranked #2 on worst places to live in Britain, and I have lunch almost everyday in Hackney, ranked #1 on the same infamous list), as usual trying to block out all of the "noise" of London ( if I may borrow the term from Mr. Nicolas N. Taleb ), I was trying to digest the crash of Lehman Brothers, which now takes over WorldCom as the biggest bankruptcy in US , and subsequently, World history.
A bit later, I talked to a good friend of mine back home in Lebanon, who, apparently was only worried about the cost of petrol for his car. The magnitude of the financial crisis, obviously seemed much different to him than it was to me, which made me think, what is the impact of this crisis on the rest of the "non-modernized" if I may use this term sparingly to refer to the Western world, or Europe and the United States to be exact.
Well, I like to follow the KISS principle : Keep It Simple and Stupid. Fair enough, so here is, simple enough for anyone who lives in the Middle East, and reads "Layalina" or any of the other "Hello" type tabloids:
Lehman Brothers owes to Citigroup, to which Prince Al-Waleed Bin Talal is a major shareholder, and a couple of other banks, what is near $155 Billion , which is a quite a fair amount. Although the Prince may not be worrying about paying his mortgage just yet, this will definitely have an impact on his portfolio. i.e. he may have to rethink his investments in the media, and his ambitions in the political scene in Lebanon.
That's for the common man, KISS style. The real issue that will surely have ripples that will affect the Middle East economy, is , well, oil prices, as with the markets crashing, oil dropped to $94 per barrel. This is definitely not bad news for some, but, if continues, may have an impact on the investment strategies of sovereign wealth funds, such as ADIA. The Arabs are already deep in investing in the western markets, but these investments, in return are dependent on the excess cashflow from high oil prices (peaking at $165 this year). These funds are no way close to liquidity problems surely, but, well, if you are making half the money you were when you threw in a few billion to bailout the ailing European markets, well.... tough luck. Why? The Western economies, also called economies of scale , have strong manufacturing industries to which low energy prices will only help, while unfortunately, the Middle East has hardly any industries that can sustain an economy over a long period. A quick look at the Middle East Financial Markets, and the listed companies, besides Saudi Arabia to (to which I worked in for a while , and was actually impressed), no country has any significant "heavy weight" industries.
This is just a bird's eye view of what the worst crisis since the Great Depression in 1929 can impact the Middle East, and the world. It's so bad, that only 2 investment banks, Goldman Sachs and Morgan Stanley, still stand, out of the Big Five (Lehmans, Merril, Bear Stearns being the other three ... may they R.I.P.).
I'll keep thinking about it whilst smeling the lovely pollution of the London Underground tomorrow morning.
A bit later, I talked to a good friend of mine back home in Lebanon, who, apparently was only worried about the cost of petrol for his car. The magnitude of the financial crisis, obviously seemed much different to him than it was to me, which made me think, what is the impact of this crisis on the rest of the "non-modernized" if I may use this term sparingly to refer to the Western world, or Europe and the United States to be exact.
Well, I like to follow the KISS principle : Keep It Simple and Stupid. Fair enough, so here is, simple enough for anyone who lives in the Middle East, and reads "Layalina" or any of the other "Hello" type tabloids:
Lehman Brothers owes to Citigroup, to which Prince Al-Waleed Bin Talal is a major shareholder, and a couple of other banks, what is near $155 Billion , which is a quite a fair amount. Although the Prince may not be worrying about paying his mortgage just yet, this will definitely have an impact on his portfolio. i.e. he may have to rethink his investments in the media, and his ambitions in the political scene in Lebanon.
That's for the common man, KISS style. The real issue that will surely have ripples that will affect the Middle East economy, is , well, oil prices, as with the markets crashing, oil dropped to $94 per barrel. This is definitely not bad news for some, but, if continues, may have an impact on the investment strategies of sovereign wealth funds, such as ADIA. The Arabs are already deep in investing in the western markets, but these investments, in return are dependent on the excess cashflow from high oil prices (peaking at $165 this year). These funds are no way close to liquidity problems surely, but, well, if you are making half the money you were when you threw in a few billion to bailout the ailing European markets, well.... tough luck. Why? The Western economies, also called economies of scale , have strong manufacturing industries to which low energy prices will only help, while unfortunately, the Middle East has hardly any industries that can sustain an economy over a long period. A quick look at the Middle East Financial Markets, and the listed companies, besides Saudi Arabia to (to which I worked in for a while , and was actually impressed), no country has any significant "heavy weight" industries.
This is just a bird's eye view of what the worst crisis since the Great Depression in 1929 can impact the Middle East, and the world. It's so bad, that only 2 investment banks, Goldman Sachs and Morgan Stanley, still stand, out of the Big Five (Lehmans, Merril, Bear Stearns being the other three ... may they R.I.P.).
I'll keep thinking about it whilst smeling the lovely pollution of the London Underground tomorrow morning.
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