Wednesday, November 26, 2008

US Governmental Bailout Glossary

If you have been like me, than you've tried to follow our mercurial capital markets and the US governmental responses these past few months with increasing confusion. It's hard to imagine a better illustration of what uncertainly feels like except for us going into a world war. It is now clear that we need a score card to track all the acronyms and activities. Below is my attempt to summarize the US governmental programs thus far. I shall endeavour to update this post as new programs are announced. Please feel free to leave comments with additional details which may help fellow market watchers.

US Treasury Program

TARP/CPP (Troubled Asset Relief Program/Capital Purchase Program)
Approved 10/3/2008 as part of the EESA.
A $700 billions flexible program which initially targeted purchase of distressed MBS/ABSs. That has been replaced by direct investment into preferred shares and warrants of banks .

Federal Reserve Programs

TAF (Term Auction Facility)
Initated 12/17/2007, this facility makes low interest loans for 28 or 84 days to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window.

AMLF ( ABCP MMMF Liquidity Facility )
Began 9/19/2008, the AMLF finances the purchases of ABCP by banking organizations with loans from the Federal Reserve Bank of Boston at the primary credit rate. The loans are collateralized by the ABCP but are without recourse to the borrowing banking organization. Currently set to expire in January 2009.

MMIFF (Money Market Investor Funding Facility)
Announced 10/21/2008, the Fed will finance up to $540 bn purchase of CD, bank notes and CP up to 90 days maturity by SPV from 50 financial institutions.

CPFF (Commercial Paper Funding Facility)
Operational since 10/27/2008, the CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers.

(To Be Determined)
The Federal Reserve announced on 11/25 that it would buy up to $500 billion in agency mortgage-backed assets from the government-sponsored mortgage finance giants
The agency would also buy up to $100 billion in debt directly/via auction from the GSEs above and the FHLB.
"Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end."
The average rate for a 30-year fixed mortgage fell to about 5.5 percent after starting at 6.38 percent yesterday

TALF (Term Asset-Backed Securities Loan Facility)
Announced 11/25.
The Fed would make 1 year loans totaling up to $200 billion on a nonrecourse basis to holders of asset-backed securities supported by car loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration. US Treasury will use $20 billion from TARP to seed this program.


FDIC Program

Temporary Liquidity Guarantee Program (TLGP)
"The Program guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and provides full coverage of non-interest bearing deposit transaction accounts."
"The goal of the TLGP is to decrease the cost of bank funding so that bank lending to consumers and businesses will normalize."
This insurance costs is on a sliding scale. "Shorter-term debt will have a lower fee structure and longer-term debt will have a higher fee. The range will be 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis."
Goldman was the first to sell $5bn new debt under the guarantee of this program on 11/24.

General Terms

Asset Backed Commercial Paper (ABCP)
EESA (Emergency Economic Stabilization Act)
Money Market Mutual Fund (MMMF)
GSE (Government Sponsored Enterprise) Includes: Fannie Mae, Freddie Mac, Ginnie Mae.
SPV (Special Purpose Vehicle)

Wednesday, July 30, 2008

Address to the CIAI Quarterly Equity Forum, NYC 7/25/2008

Distinguished panels and guests:

From the presentations by the august panelist today and also reading the headlines, we can see that both China and US economies both face enormous uncertainties:
recession or recovery, correlation or decoupling, peak oil or abundance, inflation or stagnation.

But there is also an interesting contrast between the 2 environments.
Within PRC, there is an optimism, a belief that they can create a better future. Within USA, there is a feeling of being lost at sea, not sure of which way to go and a fear of ‘things getting worse’.

Is it a case of the glass being half full or half empty?
I propose that we are facing REAL uncertainties here pregnant with REAL possibilites.

Consider the story of Nan-in, a Japanese master during the Meiji era.
One time he received a university professor who came to inquire about Zen. Nan-in served tea. He poured his visitor’s cup full, and then kept on pouring. The professor watched the overflow until he no longer could restrain himself.
“It’s is overfull. No more will go in!”
“Like this cup,” Nan-in said, “you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup?”

When the civic leaders and reporters are all repeating the same sets of stories, it is very hard to change the pattern, to inject new ideas and stories for consideration. But when there is REAL Uncertainty and no one is sure of the ‘right’ stories, there is an opening, there are possibilities for many ideas to bloom, for real changes in the mid to occur.

I would suggest that we have such an opportunity today.

I have noticed in the US press and civic dialogue about China, there is a bi-polar quality: love of Chinese culture, distain for governance & regulation; partners in fighting terror, rivals in economic affairs; one moment it’s an ideological menace, next it’s a new face of capitalism. There varied and conflicting stories are constantly vying for acceptance.

Those with experiences in both these cultures have a unique role. We have the understanding of history and culture from both side. Those of us in business and finance understands further the gears and levers of global economic and finances which are a critical linkage between the two economies. We have the knowledge and the opportunity to create New Stories. Storeis that help America make sense of the Chinese people and stories that help China make sense of itself and the world.

What kind of stories could these be?

Stories that made a difference.

Consider one example:
Anthropoligist Margaret Mead’s book “Coming of Age in Samoa” was a hit academically and popularly in the 30’s great depression era. The then exotic familial and childrearing practices in Melanisia were both shocking and enticing to her contemporaries. She demonstrated that anthropologists have a privileged position to comment on human affairs because of their intimate knowledge of diverse cultures.

The world was emerging from the end of the colonial era, America was groping its way toward its proper role for a world power, one with active ties and commitments all over the globe. To a significant degree, China is going through the same phase today.

Margert Mead challenged many unexamined believes: including the universal believe that “we” are special and superior to other cultural groups. She convinced most of Americans that we should learn from other societies so that mutual understanding would reduce conflicts. That was a radical thought in that age.

She changed how US people viewed herself in relation to the rest of the world. And her ideas influenced social trends in the ‘60s and continues up to today. In other words, she found a power Story which resonated with her contemporary audiences.

Ross Perot said, “We owe it to the American people to explain to them in plain language, where we are, where we are going, and what we have to do. Then we need to build a consensus to do it.”
This is what our new Stories must do.
We need Stories that will encourage both US and china to build a long term partnership for prosperity, health, and peace.

In spite of the many competing stories, the sense of Uncertainty today gives us an opportunity to shape this change.

Guilermos del Torro said in an interview, “The art of the director is meeting the compromises (in film making) with creativity.” Let me paraphrase him to said:

Our challenge today is Meeting our Uncertainties with creativity.
Creatively crafting new stories that work.

I challenge you to contribute New Stories that make a difference.
Or provide counter stories to erroneous stories in the press.

I look forward to engaging with you creatively in this area.

Friday, June 27, 2008

In Praise of Randomness

In this age of anxieties, when one is threatened daily with terrorist attacks, financial collapses, job stealing immigrants, political nuclear options, perhaps it seems odd to defend yet another source of anxiety: Randomness.

In fact, we despise Randomness so much that we develop an entire discipline to eliminate it: Control Theory. This discipline works well enough to make our industrial automation effort effective and efficient.

We also developed mental explanations for random phenomena: spirits, god, karma, Just-so stories, etc. Some of these memes are so successful that they’ve built entire religions around themselves.

So then why should I praise Randomness?
Consider what life might be like if there was no randomness at all.

  • There would be no more accidents
  • Climatic changes could be predicted precisely and dealt with
  • Political conflicts might not arise since one can predict the exact reactions of opponents


But also:

  • Homo sapiens might not have evolved yet
  • We would be stuck in a Trafalmadorian or clockwork style universe with its every click well known to all its inhabitants.
  • Strong encryption may be impossible.

Counterfactuals would be meaningless!

Why would Homo Sapiens not have evolved?
It turns out that without the randomness injected by sexual combination and to a lesser extent, mutation, a genetic population would take much longer to adapt to large environmental change. Frankly, they have a higher probability of becoming extinct. This is because the randomness creates a large number of new genetic combinations in each child generation where some of them are likely to be well adapted to the new environment.

In fact, one might say that evolution cannot work at all without randomness. A world without randomness would be a Christian fundamentalist’s type of world with only fixed types of animals and no possibilities for new species to arise save for divine intervention.

There are more mundane ways in which randomness help us.
Consider the Beancounter or Coin sorter one finds in the banks or supermarkets.
These sorters do not evaluate each coin one at and time and drop it into the right bin. Rather, they take advantage of the size differences between the coins and shake them rigorously over a series of masks so that each mask filters out the next largest size coin. This is a much simpler and efficient design than ones that deal with one coin at a time. Such mechanisms are also used commonly in many industrial applications.

In paper making, the random orientation of the fiber helps provide tear resistance.

The randomness used in encryption key generation help make the cipher hard to break. If there were too much order in the key generation process, then it would be easy to break.

With the advent of chaos theory, we now know that deterministic systems can easily elude our understanding and predictions. Even more fortunate for us, Einstein seems to be wrong and God “does” play dice with our universe; randomness appears to be an intrinsic property of our world.

I find real joy in this. A universe without randomness would be boring indeed.


Technorati Tags: randomness evolution

Monday, May 26, 2008

First Post.

Greetings, my friends.

I started this blog not to share Fish Stories, but to connect with people intertested in Uncertainty, Eastern philosophies, and how to apply insights into our daily lives.  
Some of the themes I plan to explore in future posts include:

   The Joys of Randomness
   Hierarchy of Uncertainties
   Is there a price for everything?
   Investments under uncertainty
   Invariance vs. Certainty   

Mr. Taleb have made famous the creature Black Swan which has terrorized the financial market of late.  Let's locate together, the Flukes, who might make our lives better.
 
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