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Guest Post: The Information Content Of A Haircut
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Inflation v. Deflation - Martin Armstrong
from-the-hole-5-3-23-10.pdf
marty: “stock crashes do not create depressions
bond collapses create depressions”
A few thoughts: The ever increasing need within a reward system (usury) , mankind having ever higher populations, ever higher demands-expectations of attaining an improving social order-progress ie.. (individual rights) , higher living standards ( higher wages) , these forming an ever increasing enter-dependence of systemic process globally, and many other interactions of capital formation associated with banking services, representation, the process of civilization itself does not allow for a.k.a.......hair-cuts.. period!!!. A hair-cut is an idealistic phanthom , a mirage in the process of wealth creation. A defeat, a default. an admission that an imbalance exist , poor vision between those that create wealth and those that distribute. A failure of management and representation.
There can never be a genuine balance nor hair cut, only the battle of the fitest.........' It's the economy stupid' .... only the economy 's heart and soul is industry not banking( selling dept as a reward) only sets a finite date of calling for a hair cut.
In short: the current system is unworkable, it's failure assured. But failure must come if we are to be able to be rewarded for our labor. Utopia is a dangerous mirage it implies human nature no longer exist.
A few months ago I bought a $20 electric clipper and do my own haircuts!
Do you use the salad-bowl-over-the-head method or the close-your-eyes-and-hope-for-the-best method?
Just asking for future reference. :>)
Hey CD, I use different numbers of clipper attachment for the side and top. e.g. #1 sides and back, #2 top. No mirror to check the back, just ask my friends if I missed a spot. Saving $20.00 on haircuts!
yep been using a pair of scissors once a month for over 25 years=about $7500 or so.
http://www.ehow.com/how_2241521_layer-cut-ones-own-hair.html
And I thought only hippies didn't like haircuts.
The problem for me, after reading this post twice, is that I still don't understand what exactly a "haircut" is. Is "haircut" a financial term or jargon for the instance of having to settle for less than what was expected? And in that case, how did that happen? A contract is a contract. Is this a story about intraparty renegotiation of prior agreements? I don't understand any of this.
I'm sorry. This is my fault; it is hard to know exactly where to begin.
In this world there are precious few things actually owned. Most things contain a fraction of ownership, and a chunk of borrowed capital that entitles a holder to its use. This relationship between credit and use rights is capitalism: there is no other way to view it. BTW--When you see banks being told to write off principal on underwater mortages, know that capitalism at its essense is twisted into something grotesque.
The same things that apply to mortgages--downpayments, repayment of debt, cancelling of use agreements--are straightforward analogues of interbank financing.
When times are good, credit risk is lower (meaning the likelihood of repayment is high), so creditors accept easier downpayment terms. this downpayment in the interbank universe is called collateral.
To adjust for credit risk (the likelihood of not getting paid back for credit extended), debtors must accept discounted value on their collateral. That is a haircut.
When times are bad, haircuts are higher. Sometimes asset are no longer accepted as collateral--the haircut becomes 100%.
The data tells you that developed government securities in very bad times take small haircuts. Of interest, their value exploded, while the haircut was constant. The more risky the asset becomes, the greater the haircut. The haircuts on risk were extreme coming out of Nov 2008.
Crashes are as much moments of clarity as they are panics. Market valuations are unstable... there is no fundamental value. Don't be too quick to dump sovereign debt even though its "fundamentals" suck. The world can thoroughly change in a year or so, no?
Thoughts?
I guess it's not something I see in my limited experience---that collateral, generally money-good, could change in value and thereby bring into play contract terms written against just such an event. Thanks for explaining it to me.
When you are deal with multi-million dollar transactions using illiquid assets like bonds as collateral, their change in value becomes important for risk management purposes.
I've thought about it for a day, and now I wonder why there isn't "under-water mortgage" insurance, demanded by banks like fire insurance. The house is collateral in a mortgage, and if it suddenly drops in value, like in Florida or California recently, then it becomes riskier for the bank, because the mortgage buyers might walk away. And, of course, millions have.
keep going JM. The haircut analogy extends into the margin requirements for futures/commidities trading. When swaps go OTC, margining/haircuts will become more standardised. Money made from collateral management will disappear ( forget the long word for describing the on-lending of collateral and margin funds by the person who gets collateral). You are on the right track, piecing all this together is tough.
Check this out from January 2009: http://gsl.tv/news/32/panel-collateral-management
Higgins: From a collateral perspective, liquidity is key. Historically, collateralised lending has been the sustainable method of ensuring liquidity in periods of turmoil. Within The Bank of New York Mellon's Global Collateral Management programme, there is a greater demand for the re-use of collateral. Collateral can no longer only be used for the initial move, it needs to be re-used to gain the required efficiencies. Now that most firms have moved to a fully collateralised environment, we are seeing a greater demand for collateral. To avoid a collateral shortage in the market, firms can no longer afford not to re-use collateral. And if a cash lending firm needs to raise liquidity, they must be in a position to benefit economically from collateral received.
If you find the answer you might position your friends ahead of the release of a discovered black swan being deferred, or we may break into a better/reversion to allowing markets to be aware of and price risks correctly rather than the current obfuscation.
The term is rehypothecation. I'll say more later, but for now...
The Fed's QE saved the world because it recollateralized the OTC market. But he's probably destroyed it too. QE allowed rehypthecation to recollaterlize and this is what allowed OTC notional to start expanding. If it had continued to contract, we would have hyperdeflation like has never been seen before.
Destroyed, why? The Bernanke put is more dangerous than the Greenspan put because it is buying vol ATM and now OTM, too.
It is easier to see the ATM the money part... bailing out banks and institutions. The OTM part is harder to see because it is the OTC derivatives market which at its core needs to expand otherwise the liquidity dry-up will destroy the underlying markets, so he is going to throw money at it until the lending (money velocity) kicks off again... or he blows up politically or his printer metaphorically breaks as all machines do. You know what I mean.
Bernanke is now just a reinsurer with lumpy, correlated tails that are going to blow up. No printer will be fast enough to keep up with the implosion. You understand this, so I can say freely... no one can escape this.
That's the gamble and game. Lending kicks of money velocity, or hyperdeflation.
when folks found out that Lehmans had on lent collateral to a third party (read ABS/SIV) and that folks had lost the money they had pledged as collateral, the world kind of gasped.
Gasped, meaning a moment of vision when they could see no backstop for a tsunami?
the issue only became apparent when a) large market swings occurred and b) the ABS/SIVs became worthless. Of course, if the Fed guarantees all SIVs and any other credit, then there is no discovery, ever.
rehypothecation! weeee lol what a word! Anyway, if collateral is rehypothecated (cash or securities) then isn't this part of the house of cards/emperors new clothes scenario where there is actually no such thing as collateralisation since the collateral can go all the way back to the original pledger of collateral (for a "Too small" rent) and no-one would know?
Oh yes. See above. I'm a little behind your posting.
I like the comparison with A-T-M and O-T-M.
I am in the camp that thinks options are the first derivative, not the second or third since I believe that returns come from risks/vol. I am not a fundamental believer in behavioral finance, since it cannot exist without the abuses of poorly qualified regulators. I can see the merit in behavioral finance for identifying where risk is not being rewarded (cheapness) or risk is being overpaid (dearness) but it cannot competer with the pricing of risk in terms probabilistic definition of possible outcomes. I mention this because collateral represents a source of risk that is being used to mitigate risk for fundamental (behavioral) reasons. Saying you will have an expoure to a counterparty if that counterparty provides someone elses risk and can be paid for with a tiny rent (repo) is patently flawed logic. But..I am hungover so I am not thinking as clearly as usual!
$.02
It is hard to be accurate with the option analogue, for three reasons.
There is a difference between the treasury, who could BK from all the issuance, and the Fed who is buying a lot of gov paper. But in another sense they are the same. I mean if the Fed becomes insolvent, then you gotta know the treasury will be seriously pressured to recapitalize them with more treasury issuance. Who can figure out this mess?
The other aspect is the unobservables of the Fed balance sheet. Sure they have a lot of treasuries, but what other crap do they hold?
And how "hard and fast" are all these backstops? By this I mean if the thing blows up, then will the Fed/Treasury cut their losses before they become existentially challenged?
So what do you do? You hedge "ATM" risk with G7 sovereigns. You hedge "OTM" risk with what? Something levered up to the gills, and thus will crater?
I guess you can do this by being synthetically short recovery rate?
How do you get long gamma to this?
take a bath
grab a hair cut
government will do a
Burma Shave
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