Winner's Game

In part, this is because most fund managers do not compete on price. Instead, they persuade their clients to select their funds on the basis of past performance, even though there is little evidence to show that this is a good predictor of future success.

# by stupid-market | 2008-02-29 09:07 | Asset Management


The PBGC currently has approximately $55 billion to invest in the new investment policy. Under this new policy, the PBGC will allocate 45 percent of its assets to a diversified set of fixed-income investments, 45 percent to diversified equity investments and 10 percent to alternative investment classes. The agency’s previous policy set an equity investment target of 15–25 percent, although the actual level of equity investments was 28 percent at the end of FY 2007.


The PBGC press release asserts that the new strategy significantly increases the likelihood of full funding within 10 years and that the new policy "is designed to take advantage of a long-term investment horizon". The PBGC clearly believes that equity risk, measured by the volatility of returns, decreases the longer the time horizon.

Volatility analysis as a measure of equity risk ignores the severity of any shortfall. Although the probability that equities will earn less than the risk-free rate decreases with the time horizon, the extent of any possible shortfall increases. Equity risk should be measured as the cost of buying insurance via an equity put option, which increases over time. Adjusted for risk there is no equity "free lunch".

# by stupid-market | 2008-02-28 13:37 | Pension





Next Oz writes some covered options on this event and sells 110 million of them in the derivatives market. This obligates him to pay the option holders $110 million if the event does occur and nothing if it does not. He collects $11 million on the options. To cover his obligations in case the 'bad' event occurs, he uses the investors' money plus the proceeds from the options to buy $110 million in one-year Treasury bills yielding 4 percent, which he deposits in escrow. This leaves $1 million in "pocket money," which he uses to lease some computer terminals and hire a few geeks to sit in front of them, just in case his investors drop by.

The probability is ninety percent that the bad event does not occur and Oz owes nothing to the option holders. With a gross return (before expenses) of $15,400,000, the investors are thrilled, and so is Oz. He collects $2 million in management fees (of which he has only spent $1 million), plus a performance bonus equal to 20 percent of the 'excess return', namely, 20 percent of $11,400,000. All in all, Oz nets over $3 million for doing absolutely nothing.

# by stupid-market | 2008-02-28 11:05 | SWF



Based on the risks in MBIA's portfolio, as assessed by Moody's according to the approach outlined above, estimated stress-case losses would be in the range of $13.7 billion. This compares to Moody's estimate of MBIA's claims paying resources of approximately $16.1 billion, resulting in a total capital ratio of about 1.2x, which is significantly in excess of the "minimum" Aaa level, but short of the 1.3x Aaa "target" level by about $1.7 billion.

へー、最大推定損失額は137億ドルだけど、161億円は用意できるからAAAということですか。ちなみに今日のMBIAのMarket Capは21億ドルです。何かがオカシイ。
# by stupid-market | 2008-02-28 10:38 | Rating Agency



Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

"The disclosure on VIEs is hopeless,'' Azarchs said. "You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''


HT: Long or Short Capital
# by stupid-market | 2008-02-28 09:57 | Rating Agency