Comments on Rick Bookstaber: Conversations with the Trading Desk

having worked in risk control (back office - no P&...

2008-12-01T09:17:00.000-05:00

having worked in risk control (back office - no P&L) and risk management (front office - P&L) I think this article gets to one of the major problems banks have. in order to capture flow and volume they need to be big. Being big means lots of employees and reports and numbers to churn. That means the partnership culture goes out the window and that the controller ends up weaker than the front office and at the same time always in ar** covering mode. This leads to overreliance on models and being able to prove they ran a scenario even if he/she doesn't act upon it. The internal dynamic of trader / controller is echoed in bank / regulator. A sensible discussion is not possible; traders are not held responsible for tail losses and controllers / regulators feel exposed and so react defensively.

In investment banks you do not get paid to save mo...

2008-01-19T09:28:00.000-05:00

In investment banks you do not get paid to save money - simple!
Until this changes this process (boom and bust) will repeat.
If you have a view you need to have the ability to express it to make money. Opposing views (and market bets) need to be allowed.
The problem is: how do you structure an organisation to do this, survive and prosper? You cannot.
You have to allow people to pay for their mistakes. Nothing changes. Get used to it.
The financial bailouts and economic stimuli are all coming. This is the real game and not the game that you are taught.

I'm a market maker for israeli OTC stocks and you ...

2008-01-02T16:46:00.000-05:00

I'm a market maker for israeli OTC stocks and you are right about those guys, who trade. They're usually fresh out of college without any respect for risk. History repeats itself. I was expecting the 1987 October 19-th scenario, but Bernanke didn't let it happen. I am biased he shouldn't get into the picture and let it fall. Totally agree with Jim Rogers that Fed wasn't established to bail out the hedge funds. Let 'em crash! The ones who didn't deal with crap like subprime wouldn't even feel it while shorting the stock index futures.

Hey Rick,

do you mind telling me what's the...

2007-12-24T06:18:00.000-05:00

Hey Rick,

do you mind telling me what's the principle trading strategy made by the trading desk over here?

Is is similar to those SIVs were doing? borrowing on the short end of the yield curve to finance the longer end (like Citron's style you mentioned in your book).

I know about 40 VP level risk manager most of them...

2007-12-12T08:48:00.000-05:00

I know about 40 VP level risk manager most of them wouldnt have the brains to ask the questions you mnetion much less act on them

Wall street with go the way of Detroit

Your comment:

"in most large firms the ris...

2007-12-08T18:00:00.000-05:00

Your comment:

"in most large firms the risk manager makes himself too busy to really focus on risk management. If he lets himself get sucked into making the role look weighty, he will end up spending his time running an organization, worrying about having adequate face time with senior management, and elbowing his way into all the right meetings. What he should be doing instead of all that is spend time trying to think outside of the box. There are possibly hundreds -- in some cases thousands -- of people in his organization, reams of risk reports to run through and meetings all day long. The risk manager can end up looking really, really busy while not actually doing his job."

describes more than just risk managers. It seems to me that much of corporate business consists of meetings whose primary purpose is to make people feel busy and important.

I have added a new post on mark to value versus ma...

2007-12-06T11:19:00.000-05:00

I have added a new post on mark to value versus mark to liquidity which answers the question posed by "B" in his comment about E-Trade.

More like a conversation with himself - if this is...

2007-12-06T07:53:00.000-05:00

More like a conversation with himself - if this is how he behaved as a risk manager without any b*lls then no wonder he fabricates theories and exploits rumors in his book. (Which is a defense of the meek risk manager -even if they review things and approve them they are unaccountable).

I have added to this post to try to address the qu...

2007-12-04T14:00:00.000-05:00

I have added to this post to try to address the question asked by Tim.

Rick, you're writing is very interesting reading. ...

2007-12-03T15:43:00.000-05:00

Rick, you're writing is very interesting reading. Absent a correction from some major debacle - how much respect does the Risk side of the house get in Financial firms? It doesn't take much imagination to see every conversation shaping up like your example (Chicken Little vs. the Rainmakers)

Because of the inclusion of rated collateral withi...

2007-12-03T03:37:00.000-05:00

Because of the inclusion of rated collateral within securitisations (primarily CDOs but also SIVs/ABS CP and monoline portfolios for that matter) most traders have an implicit objective assumption about what credit ratings mean. AAA, for example, means 1% risk of default over 10 years. The reason is that is what assumption is used within the credit tranching models used by the rating agencies. However, ratings are ALWAYS subjective relative designations. They are never objective and they do not imply a precise distribution of expected losses. If you believe otherwise, just simply ask yourself how much historical data would be required to characterise a AAA default distribution. Enough said. The problem which ratings is how they are used quantitatively - we have a simple empirical problem - we do not have sufficient data. Period. We certainly have nothing like sufficient data to characterise the loss distributions for a new debt product like subprime mortgages. They should never have been rated. They should certainly never have been the subject of double and triple levels of securitisation (CDOs, CDO squareds). Sometimes we take a reasonable looking approach and bastardise it. In this case, it is garbage in, garbage out.

Did you see a 28 November article in the Washingto...

2007-12-03T00:03:00.000-05:00

Did you see a 28 November article in the Washington Post by Stephen Pearlstein? You sound much like him.

Rick,

Do you have any comments on the valid...

2007-12-02T23:37:00.000-05:00

Rick,

Do you have any comments on the validity of the E*Trade Citadel transaction as a benchmark for RMBS and CDO paper? While this was a basket of different types of paper, one can infer a rough sense of values given that prime first lien securitizations (rated AA or higher) comprised more than half the portfolio. There is a post on Calculated Risk that decribes an attempt to do this. Any comments on whether you think this trade will impact values across the street?