leverage Archives - Where Is The Outrage?

The problem with Syria

If you are a policy wonk and you love human nature, studying the Middle East, and specifically Syria, is fascinating. There are tons of ancient history and complex issues encompassing religion, tribalism, wealth and power.

Syria is located on the eastern end of the Mediterranean Sea. To the north is Turkey. To the east is Iraq. South is Jordan and west is Lebanon. Israel, Saudi Arabia, Iran and Egypt are not far. This is just an extremely difficult area the world.

Basically, as I see it, we have a president who is desperately trying to hold onto power. We saw something similar in Egypt and Tunisia recently. The United States does not have close ties with Syria. Therefore, our leverage over Syria is limited. So, the question becomes how do we influence Syria? For conservatives, the answers are not satisfying. There is no direct way that we have to influence Syria. Russia and China have direct ties to Syria. They have the ability to truly influence how Syria behaves. For the most part, over the last several weeks, neither Russia nor China has been all that interested in stopping the violence within Syria. It is only recently that the UN Security Council has taken up a resolution to seriously end the fighting and massacres. This latest Security Council resolution to impose a cease-fire was spearheaded by Russia and the European Union.

As I see it, there are no good solutions without strong intervention from Russia and China. We can do what we can to try to influence Russia and China, but I do not see a role for United States getting directly involved in stopping the violence. This is different than Libya. In Libya, we had strong backing from Britain and France. They were willing to get directly involved. There’s no such willingness from Britain or France to do such in Syria. I think there’s a huge role for the Arab League to get involved. As a matter of fact, I think they should take the lead. The Arab League in conjunction with Russia and China can fix this problem. We should have a strong but supportive role.

What are your thoughts?

By ecthompsonmd|2012-04-21T20:16:00-04:00April 21st, 2012|Foreign Affairs|Comments Off

Long-Term Capital Management – The Carnage

This is the last in my series (here, here, here) on Long-Term Capital Management. For those who haven’t been following, long-term capital management is a hedge fund that was started by John Meriwether. John Meriwether was one of the founders of arbitrage trading. He started this over at Salomon Brothers. Meriwether gathered an All-Star team and opened the fund in 1994. The first three years can only be described as an amazing success. Almost everything they touched turned to gold. There were using the sophisticated computer models which wowed Wall Street. (Much of the following information comes from the book When Genius Failed – The Rise and Fall of Long-Term Capital Management.)

If one person is making money on Wall Street, you can bet that everyone, is looking to see how that person is making money. Everyone will try to duplicate what ever it is you’re doing. All of the major brokerage houses open up their own arbitrage unit. By the end of 1997 investment opportunities were closing. LTCM returned $2.7 billion to its investors. (LTCM increase their leverage in the markets and did not reduce their exposure.) The exact reason for the return is unclear. It is clear that LTCM was making money hand over fist. It is also clear that LTCM was a huge player in many markets, if you’re too big, you are the market. None of the complex formulas that LTCM used assumed that they would become the market and therefore change market conditions.

The above graph, reveals the life and times of LTCM. It’s crash was spectacular. The exact reason for the clash, or like all crashes, multifactorial. The “geniuses” at LTCM did not really manage their risk. Instead, they may multiple variations of the same that throughout the world. Secondly, they leveraged their leverage. It is pretty amazing that you can raise $1 billion just by showing up and shaking some hands. Then, you buy securities with ease funds and leverage the securities. Through derivatives and other financial means you leverage your securities, again. In 1998, LTCM had approximate $4 billion under management but had leverage this $4 billion to over $1 trillion in transactions.

A large consortium of banks was called together at the New York Fed. Long-term capital management was going under. They were in deep trouble. They lost a spectacular amount of money in a short period of time. There was a fear, because LTCM was entwined with so many different financial institutions that they could destabilize the whole system. I hope this sounds familiar. It should. Mortgage-backed securities blew up and we were told that they would destabilize the whole system and therefore we had to “rescue” Wall Street. So, 10 years earlier, in 1999, more than a dozen of the nation’s largest financial institutions were brought together in order to rescue LTCM. In the end, billions were lost.

Yes, Wall Street was saved and LTCM was lost but, the bottom line is – what was learned? LTCM was a black box. They held their information incredibly close to the vest. We need greater disclosure. LTCM, like most hedge funds, would send out a quarterly report but it would say nothing. It would not mention any the specific trades or even how they were trading. We need more disclosure. There has to be some limits on leverage. 100 to one seems to be somewhat excessive. There has to be some risk management. The risk management has to be more than just a formula that is hidden in some closet somewhere. There was no one at LTCM that was responsible for risk. None of the companies that lent LTCM money actually poured through its books to figure out risk exposure. (One of the cries from conservatives would be that these are private companies doing whatever they want with private money, what’s the big deal? Whenever a deal/company can get so big that it can bring down all of Wall Street, it needs to be regulated.) The bottom line, as I see it, was that there was no supervision. There is no outside government regulators. There’s nobody within the company that supervised training and risk. None of the companies that handed over truckloads of money actually did any supervising. So, 10 years later, when the housing market began to melt down, we see some of the same problems. Lax regulations. Little or no supervision. Risky derivatives. Unfortunately, I still think that we learned our lesson.

Other Resources:

Risk Institute
SharpeInvesting
Seeking Alpha
New York Times
New York Times on derivatives regulation
Paul Krugman – here and here
Government report on LTCM

By ecthompsonmd|2010-10-09T17:12:28-04:00October 9th, 2010|Economy|Comments Off

I got you, babe

In the late 1970s, Sonny and Cher sang this cute tune. They were singing to each other. Now our Senators are singing the same song to Wall Street. Brown-Kaufman was a reasonable proposal. It limited the size of banks to a percentage of our GDP. The proposal went down in flames. Why? Wouldn’t limiting bank size actually help the middle class? I thought that’s what Congress wanted to do… help the middle class?

Simon Johnson has more:

The Brown-Kaufman SAFE Banking Amendment proposed a hard size cap on our largest banks, limiting their assets to a very small fraction of the size of our economy. The premise was simple – and could fit on a bumper sticker (or in a campaign flyer for November) – “too big to fail” is too big to exist.

But this proposal to modify the Dodd-Frank financial reform bill failed in the Senate in early May, by a vote of 33-61, with 27 Democrats voting against the idea. Since that time, Democratic supporters have been asking their representatives the obvious question: Why did you vote against Brown-Kaufman?

Interestingly, no senators yet have replied – at least on the record – that the power of the megabanks was too great to be overcome. Instead, there are three main arguments going the rounds.

First, some argue that the Brown-Kaufman would by itself not have completely solved all the problems that can cause our financial system to meltdown. As one senator put it in a recent letter, “[Brown-Kaufman] would not solve the problem of systemic risk and systemically important institutions in a comprehensive manner.” (more…)

By ecthompsonmd|2010-08-21T09:11:19-04:00August 21st, 2010|Economy|Comments Off