CalPERS, the largest public pension fund in the US, is widely seen as an industry leader and its practices are emulated by other public pension funds. CalPERS has just announced that it is withdrawing from hedge fund investing entirely.
Ironically, the very first post on this website, on December 19, 2006, Fools and Their Money (Hedge Fund Edition), chided CalPERS for its continued loyalty to hedge funds.
Read more...The Fed routinely makes decisions and pursues policies which result in it achieving the opposite of its stated goals and forecasted outcomes.
Read more...Yves here. Former Goldman managing director turned journalist Nomi Prins spoke on RT about unresolved systemic risk issues, most importantly, credit derivatives.
Read more...Yves here. The Efficient Markets Hypothesis, along with the Capital Assets Pricing Model, is one of the cornerstones of financial economics. Pity both are wrong.
Actually, it’s worse than a pity, since financial economics informs not only how professional investors construct their investment portfolios, but similarly is the foundation for orthodox thinking among retail investors. And the Efficient Markets Hypothesis and the Capital Assets Pricing Model both understate market risk, so following their dictates leads investors to take on more risk than they intended to.
Read more...Two days ago, we learned that the Chinese government was behind the bailout earlier this year of a trust product—a type of financial product that the central government has heretofore emphatically distanced itself from. Huarong Asset Management, using a 3 billion RMB loan from the Industrial and Commercial Bank of China (ICBC), the trust product seller, was the mystery lender behind the January bailout of the Credit Equals Gold trust product, the Financial Times reported on August 31. ICBC and Huarong Asset Management are both state-owned entities.
Read more...The Organised Crime and Corruption Reporting Project recently (21st August) published one of their periodic investigations, concerning a rather large moneylaundering scheme: Call it the Laundromat. It’s a complex system for laundering more than $20 billion in Russian money stolen from the government by corrupt politicians or earned through organized crime activity. It was designed to not only […]
Read more...Yves here. Readers responded positively to Pilkington’s anthropological take on the economics tribe, so we are continuing with his series. This post focuses on dodgy econometricians and economic forecasting.
Read more...Yves here. It’s a welcome surprise to see economists devise a model that delivers generally sensible results. Here, three economists looked at how financial innovation leads to an bloated financial sector as well as greatly increasing the risk of meltdown.
Read more...NC contributor Michael Crimmins flagged a Bloomberg article yesterday that described the proliferation of complex synthetic structures, depicting it as return to some of the bad risk-shifting of the blowout phase of the last credit bubble.
The amusing bit is the headline was toned down after the post was launched (you can tell by looking at the URL, which almost certainly tracks the original). The current version is the anodyne “JPMorgan Joins Goldman in Designing Derivatives for a New Generation.” But the very first paragraph flags the troubling resemblance to the last hurrah of the pre-crisis credit mania:
Read more...This is a terrific and very accessible interview with Boston College professor Ed Kane, who is a long-standing critic of the failure to rein in financial firms that feed at the taxpayer trough. At one point in the talk, Kane and his interviewer Marshall Auerback discuss how casinos are well aware of the fact that the house can lose and they monitor gamblers intensively to make sure that no one is engaging is sleight of hand. Thus if we treated our banking system like the financial casino that it has become, we’d be much better off than we are now.
Read more...The spectacle of banks wring their hands about how low volatility is leading them as well as investors to take on too much risk bears an awfully strong resemblance to a child who has killed his parents asking for sympathy for being an orphan.
Read more...This story would be funny if it weren’t so pathetic. Yesterday, the Financial Times reported that the New York Fed woke up out of its usual slumber and realized that the crisis has changed nothing and that banks still are in the business of looting have unaddressed ethics issues.
We think the market is stretched. If this is true, the market is already pricing most of the potential good news and is prone to react to bad news.
Read more...One issue we’ve raise over the year is the ways that the corporate fetish for offshoring and outsourcing greatly increases business risk. Even when savings are realized (and as we’ve discussed, in many cases, the main result is a transfer from factory/lower level workers to managers and executives), they are seldom weighed properly against the increased fragility of the operation, and the resulting exposure to big losses. For instance, extended supply chains entail more communications across the chain, longer production cycles, more shipping, all of which increase the odds of writeoffs via having too much inventory or inventory in the wrong place, and those occasional losses can swamp the savings over time.
Those supply chain risks have come into focus, as the Financial Times reminds us, as the possibility of West Coast port strikes looms.
Read more...Yves here. This post addresses a topic near and dear to my heart: the importance of financial interconnectedness, or what Richard Bookstaber called “tight coupling” in his book A Demon of Our Own Design. Tight coupling occurs when the processes in a system are so closely linked that when certain types of activities begin, they propagate through the system and cannot be halted. Or as Bookstaber put it in 2011:
Non-linear systems are complex because a change in one component can propagate through the system to lead to surprising and apparently disproportionate effect elsewhere, e.g. the famous “butterfly effect”….
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