September 9th, 2015 — Economics and Investing
Risk parity funds
Definition: low-cost funds that seek to provide investors with equity-level returns and bond-like stability.
The idea of risk-parity is based on an ages-old distinction between stocks and bonds.
Bonds are said to safer because when a company goes bankrupt, stock holders get zapped first. Bondholders get zapped second. Stocks are said to be riskier than bonds; therefore they should pay higher returns than bonds.
Why are risk parity funds a bad idea? In 2007 quants, finance whizzes who use computers to tell them what to buy and sell, invented Residential Mortgage Backed Securities (RMBS) that made the very same promise. And we all remember what happened in 2007!
The mortgage market meltdown was just the first indication of troubles on Wall Street in 2007.
Today the prices of mortgage derivatives similar to RMBSs are now the determinants of housing prices. The price of a house isn’t set by supply and demand anymore. It is set by the expected amount of capital gains over the lifetime of the buyer’s mortgage. The amounts of those expectations are set by the creators of mortgage derivatives.
In other words, speculators in housing markets are still free to create bubbles that burst. Continue reading →
July 20th, 2015 — Banks, Economics and Investing, Government
If you haven’t read Robert Reich’s explanation in the July issue of The Nation of how Goldman Sachs engineered Greece’s downfall you really ought to take a look. And please note this isn’t the only country in the world in which Goldman Sachs has become a persona non grata.
Reich’s allegations regarding Greece
Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.
As a result, about 2 percent of Greece’s debt magically disappeared from its national accounts.
The consequences were severe:
By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion.
Continue reading →
June 19th, 2015 — Economics and Investing, Government
Are you wondering why the IMF is standing by Ukraine against Ukraine’s creditors, while the IMF is refusing to extend even a smidgeon of an olive branch to Greece?
Creditors have loaned Ukraine $70 billion dollars. To receive payment of $40 billion from the IMF, the IMF required Ukraine to convince its creditors to agree with a restructuring plan that would enable Ukraine to raise $15.3 billion out of the $70 billion it owes its creditors.
A committee of bond creditors came up with such a plan for settling with Ukraine. In response Ukraine: Continue reading →