What I Learned from Losing $200 Million

That was one hell of a trade. Boy, what a wild ride.

The Sunday after Lehman fell, pacing my empty trading floor, I realized once and for all that my models and reports could no longer tell me what to do. The one unmistakable fact was that my risks would increase if oil continued its decline. I decided that when I came in on Monday, I’d place a big bet that WTI would do just that.

And on a Saturday morning bike ride up the Hudson, it occurred to me that Mexico might be willing to restructure its deal—selling us back the option it owned, and buying a new one—in a way that would lock in billions of profits for the country, while giving me a much needed windfall too. I dropped my bike in a bush and texted our salesperson about the idea.

There were many other decisions and guesses, some made alone, others with help from my team, and still others made by my boss. All were guesswork, none could I have anticipated in stress testing, and all involved abandoning my original strategy along with the illusion of control it gave me.

→ Nautilus

What If Banks Didn’t Create Money?

Switzerland to revive the 100 percent reserve banking argument :

The fall of Communism completely discredited the idea of a planned economy; even in the Soviet Union for about two decades before its collapse, few believed state planning could work. Somehow, the idea that governments are less evil and better at making financial decisions than private banks has survived that disaster. It’s mainly the banks’ fault: They have been flagrantly irresponsible. A state monopoly on money could test the theory, and Switzerland, where the central bank is disinclined to do crazy things and democratic institutions are more powerful than in most other places, could be an ideal proving ground.

→ Bloomberg

How Repo Works

An interesting and simple explanation on how repurchase-agreements work :

In a repo transaction one institution (the lender) agrees to buy an asset from another institution (the borrower) and sell the asset back to the borrower at a pre-agreed price on a pre-agreed future date (a day, a week or more). The lender takes a fee (repo interest rate payment) for ‘buying’ the asset in question and can sell the asset in the case that the borrower does not live up to the promise to repurchase it. The fundamental purpose of this circular transaction is to lend and borrow funds (and, in some cases, securities). While financial institutions use it to raise finance, central banks use it in monetary policy.

The very same technique Lehman Brothers used and perfected through the now infamous Repo 105. Read further for the NPR account :

Everybody knows the bank isn’t really selling the bond to the big company — it’s really borrowing money. So under accounting rules, the assets a bank uses in repo deals stay on the bank’s balance sheet.

But when Lehman Brothers wanted to make it look like it wasn’t borrowing so much money, the company used a special technique to get around this rule. It did repo deals where it took slightly less cash than the asset was worth.

→ Naked Capitalism

Lunch with the FT: Ben Bernanke

Martin Wolf :

I ask him whether he is confident that the improvement in the resilience of the banks is adequate. “It’s a fool’s game to predict that everything is going to be fine, because either it is fine, in which case nobody remembers your prediction, or something happens, and then … ” They remember your prediction, I interject.

Bernanke continues: “My mentor, Dale Jorgenson [of Harvard], used to say — and Larry Summers used to say this, too — that, ‘If you never miss a plane, you’re spending too much time in airports.’ If you absolutely rule out any possibility of any kind of financial crisis, then probably you’re reducing risk too much, in terms of the growth and innovation in the economy.”

→ Financial Times

The Trouble With Financial Bubbles

Follow-up on macro-microprudential policies :

Industrial quantities of research, analysis, and debate have been devoted to the causes of the 2008 crisis and its consequences; so it seems odd that senior central bankers are still so sharply divided on the central issue of financial stability. All those days spent in secret conclave in Basel, drinking through the BIS’s legendary wine cellar, have apparently led to no consensus.

→ Project Syndicate