The New American Dream: Renting

For those who are still under illusion that property prices might recover soon, here are some excerpts from Wall Street Journal. You can check the whole article here.

Here is how house ownership was rationalised...

...To own a home is to be American. To rent is to be something less.
Every generation has offered its own version of the claim that owner-occupied homes are the nation's saving grace. During the Cold War, home ownership was moral armor, protecting America from dangerous outside influences. "No man who owns his own house and lot can be a Communist," proclaimed builder William Levitt. With no more reds hiding under the beds, Bill Clinton launched National Homeownership Day in 1995, offering a new rationale about personal responsibility. "You want to reinforce family values in America, encourage two-parent households, get people to stay home?" he said. George W. Bush similarly pledged his commitment to "an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, 'welcome to my house, welcome to my piece of property.'"

Some evidence on the dire state of the housing market and future outlook...

Atlanta represents the current housing crisis in microcosm. Since the second quarter of 2006, housing values across the United States have fallen by one third. Over a million homes were lost to foreclosure nationwide in 2008, as homeowners struggled to meet payments. The number of foreclosures reached an all-time record last month—when owners of one in every 355 houses in the country received default or auction notices or were seized by creditors. The collapse in confidence in securitized, high-risk mortgages has also devastated some of the nation's largest banks and lenders. The home financing giant Fannie Mae alone held an estimated $230 billion in toxic assets. Even if there are signs of hope on the horizon (home prices ticked upward by 0.5% in May and new housing starts rose in June), analysts like Yale's Robert Shiller expect that housing prices will remain level for the next five years. Many economists, like the Wharton School's Joseph Gyourko, are beginning to make the case that public policies should encourage renting, or at least put it on a level playing field with home ownership.

In case you still wander who to blame, at least to an extent...

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation.
We are a nation of homeowners and home-speculators because of Uncle Sam.

The start of all this mess...

The Depression turned everything on its head. Between 1928, the last year of the boom, and 1933, new housing starts fell by 95%. Half of all mortgages were in default. To shore up the market, Herbert Hoover signed the Federal Home Loan Bank Act in 1932, laying the groundwork for massive federal intervention in the housing market. In 1933, as one of the signature programs of his first 100 days, Frankin Roosevelt created the Home Owners' Loan Corporation to provide low interest loans to help out foreclosed home owners. In 1934, F.D.R. created the Federal Housing Administration, which set standards for home construction, instituted 25- and 30-year mortgages, and cut interest rates. And in 1938, his administration created the Federal National Mortgage Association (Fannie Mae) which created the secondary market in mortgages. In 1944, the federal government extended generous mortgage assistance to returning veterans, most of whom could not have otherwise afforded a house. Together, these innovations had epochal consequences.

Culmination...

During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

And, finally, the New American Dream...

...If there's one lesson from the real-estate bust of the last few years, it might be time to downsize the dream, to make it a little more realistic. James Truslow Adams, the historian who coined the phrase "the American dream," one that he defined as "a better, richer, and happier life for all our citizens of every rank" also offered a prescient commentary in the midst of the Great Depression. "That dream," he wrote in 1933, "has always meant more than the accumulation of material goods." Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

Steve Jobs: Stay Hungry, Stay Foolish

Visual guide: Credit Crunch Made Easy

Probably,the finest visual guide on Credit Crunch (by Jonathan Jarvis). Everyone - from 17 year old to 77 year old - should understand at least the content of this guide about credit crunch.

The 50bn Dollar Man: Bernard Madoff

As Warren Buffett says, you only find out who is swimming naked when the tide goes out...
Felix Salmon at Market Movers has been busy today blogging about the man who lost (or swallowed or stealed or whatever) the sum, apparently, in the markets and who told his investors that he was making great returns for them.
With that money you could feed (and put the change in the pocket of) the whole of Uzbekistan (about 27m people) for about 2.5 years. Financiers moan about the guy in the street having no sympathy towards them - how is this supposed to change that?

The Bad, The Worse and The Worst...

Apologies for going off the radar for a while. I have been on holiday in Uzbekistan for a good part of October. Since, I have been working on one or two other things in addition to my day work (which I thankfully still have!).

Gosh, what happened since the end of September? Bad became worse, worse became even worse - superlatives aren’t enough to describe what is going on.

Here is what analysts at Merrill Lynch charted (click to enlarge):


According to the chart, world stock markets shed more than $35 trillion in value in the past year – i.e. they more than halved. Remember, this is just an equity value of listed stocks. If you include lost value of unlisted companies, corporate debt, consumer equity (e.g. housing equity) and consumer debt, it is easy to see that the total cost of this crisis is much higher than $35 trillion. I wouldn't be surprised if in a few years time we recall this crisis as a $100 trillion crisis.

Folks at Doug Short produced a great chart comparing how stock market performed during the last 4 mega bear markets, including the current one (click to enlarge):


Commentators liken the current crisis to the Great Depression in 1929 and Japanese crisis of the 1990th. During those periods Dow lost c.90% of its value whereas Nikkei lost 75%. So it seems we are not quite there yet. The frightening part is, the Japanese index has never recovered since (shown in the chart)…
See here, here and here for more on Japanese lesson.

On a positive note, I had a great time back in Uzbekistan; I loved the sunny weather and tasty food, and a chance to see my relatives and enjoy a company of my friends have been superb. My friends in Uzbekistan tell me “Crisis? What crisis?”. I hear this has changed since…

ps: I will be less frequent for some time, but if anyone has urgent need in certain topics, do let me know.

The World before and after September 2008…

That is how we will remember this month. That is not to say the worst is over. That is to say we have seen enough bad news to make September a defining point in the last 80 years - i.e. since the Great Depression. Here is how authoritative voices in the press and blogsphere have reflected on the events of the past few weeks.

New York Times columnist David Brooks explains the history:

…In the 1980s, the old power structures frayed, even on Wall Street. Corporate raiders took on the old business elite. Math geeks created complicated financial instruments that the top executives couldn’t control or understand. (The market for credit-default swaps alone has exploded to $45.5 trillion, up from $900 billion in 2001.)
Year followed year, and the idea of a cohesive financial establishment seemed increasingly like a thing of the past.
No more. Over the past week, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Tim Geithner of the New York Fed have nearly revived it…

Professor Nouriel Roubini clearly did not fancy USSR too much:

…So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America ; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion…This biggest bailout and nationalization in human history comes from the most fanatically and ideologically zealot free-market laissez-faire administration in US history. These are the folks who for years spewed the rhetoric of free markets and cutting down government intervention in economic affairs. But they were so fanatically ideological about free markets that they did not realize that financial and other markets without proper rules, supervision and regulation are like a jungle where greed – untempered by fear of loss or of punishment – leads to credit bubbles and asset bubbles and manias and eventual bust and panics…

Larry Elliot at Guardian expresses:

…Ben Bernanke, chairman of the Federal Reserve, and Hank Paulson, the Goldman Sachs tycoon who became US treasury secretary, have done more for socialism in the past seven days than anybody since Marx and Engels…

Willem Buiter at Maverecon reflects:

The end of American capitalism as we knew it… I almost decided to go back to bed, convinced I must be dreaming... From financialisation of the economy to the socialisation of finance. A small step for the lawyers, a huge step for mankind. Who said economics was boring?

Bankers, beware Captain Capitalism:

...I want to kill the bankers.
I don't mean that in a funny, ha ha, way. I don't mean that in a sarcastic way. I mean that in an old school American, wild wild west, you killed my father-prepare-to-die, deadly serious way. I literally want to grab my gun, get a lot of bullets, find some bankers, hunt them down and kill them. I even know the bankers I would hunt down. I know their names and where I can find them. I would do with a smile on my face. I would enjoy the action of it, I would savor it. I would go home and pour myself a well-earned drink and sleep just as soundly as I ever have, if not, probably better. I would not have one pang of guilt.

Interview series 4: Trading & Risk Management graduate recruitment, London - Part I

Here I want to discuss graduate recruitment process for Trading and Risk Management roles at one of the leading fixed income houses. Applicants are expected to pass each step to proceed to the next stage. Initial stage consists of online application, online numerical & verbal reasoning tests and telephone interview. Once successful in these stages, you will be invited to an Assessment Centre which comprises competency based interview, technical interview, written case study followed by a presentation on the same topic as the case study and finally, a trading game.
In this article I will focus on the pre-Assessment Centre stage and competency and technical interviews during the Assessment Centre.

1.Online application
You are given a relatively lengthy application. The areas to fill include your basic details, department you are applying for, education, language skills, computer skills and extra curricular activities. You will also be given an area to edit to answer competency questions such as "Why are you applying to our firm?" and "Why have you chosen your preferred role?".

2.Online tests
Once successful in online application, you will take online numerical and verbal reasoning tests. You can practise SHL's trial tests here. Another way to prepare for these tests is to do GMAT tests. Although GMAT tests are not strictly relevant, they are still helpful to improve your relevant skills.

3. Telephone interview
The idea of a phone interview is to reduce the number of applicants to manageable levels. Hence, if you make through this stage, you will find that subsequent face-to-face interviews repeat some of the questions. The interview can last 30-40mins. The focus of the interview will be on competency based questions around your motivation to join the firm and on how you would respond to a variety of work challenges.

Assessment Centre

3. Competency interview
Competency based interview will focus on your intangible skills and your motivation for your preferred role. You will also be asked questions related to your background. Interview can last from 45mins up to an hour. I will make reference to Trading role, but most of the questions apply to Risk Management roles as well.

Team work
-Can you tell me about the teams you are currently a member? What is your role? When were you last involved?
-Tell me about a time when you made a concerted effort to make a significant contribution to a team. What was your contribution? What challenges did you face?
-Tell me about a time when you are most proud of where you generated a sense of real team spirit amongst a group. What was the situation? What specifically did you do? How did it impact on the team’s performance?

Getting things done
-Tell me about a time when you had more work to do than time to complete it. How did you prioritise?
-Tell me about a time when you worked on something with limited supervision. How did you manage it?

Hunger to learn
-Give me an example of where you set a challenging goal to develop yourself and learn something new.
-Describe a time when you have faced a major setback when trying to achieve a particular goal.

Joint up thinking
-Give me an example of when you thought “outside the box” to develop a new idea?
-How many ping pong balls fit into Boeing 737?
-What are the key issues facing the industry we are in?
-What do you read to stay up to date with key industry trends?

Business specific
-Why do you want to work in Trading? What attracts you to it?
-What products interest you? Do you have preference for a particular product?
-What did you do to find out whether the role suits you?
-What challenges do you think the Trading profession is facing?

4. Technical interview

Given strong technical skills are important in Trading or Risk Management, this interview will focus on your relevant skills and experience. Interview can last from 45mins up to an hour.
-Why are you interested in trading?
-If Fed increases interest rates by 50bps, how will it influence the dollar?
-What skills do you have which would make you suitable for this position?
-What is 13/16?
-Is their any particular product area you are interested in and why?
-Do you have example where you did client facing job?
-Do you know how traders make money?
-Would you consider investment banking role?
-There are 3 cards, 0, 1, 1 written on each of them - all face down. You have £100. If you pull card with 1 written on it, you win the bet. How much would you bet?
-Again these cards, you are betting £10 for two attempts. You lost first time and second time and you are left with £80. How much would you bet for a third time?
-Do you have skills to use MS Excel and VBA?
-What are the main parameters in Black & Scholes?
-Do you have any trading ideas? What would you buy now? Why?

The ballad of the Lehman banker...

In memoriam: The ballad of the Lehman banker, sung to the tune of Don McLean’s American Pie:
Click here for accompanying music.

A long, long time ago,
I can still remember,
How much wealth there was in the Square Mile,
And I knew that if I had my chance,
I could make it in finance,
And maybe I’d have money for a while.

But subprime assets made me shiver,
With every product I’d deliver,
Bad news in the press(es),
Just look at those CDSs.

I can’t remember if I cried,
When my salary was pushed aside,
But something resounded worldwide,
The week the IB died.

So bye, bye, Lehman Brothers and I,
Needed credit to get better but the credit was dry,
Hank Paulson’s Fed had carved up the pie,
Saying, AIG’s too big to die,
AIG is too big to die.

Why’d Fuld wait, put all at stake,
Did he think he’d make more at a later date?
Greedy finance tycoons,
Now Barclay’s buying, let’s be frank,
A pretty cheap investment bank,
Can you hire me, real soon?
Well, I know that it’s a lot to ask,
When Einhorn’s taken us to task,
Using our balance sheet to guise,
Our level 3 assets’ demise.

Now Morgan Stanley’s feeling short,
And BofA’s Merrill’s last resort,
The banking system’s pretty morte,
The week the IB died.

I was saying,
Bye, bye, Lehman Brothers and I,
Needed credit to get better but the credit was dry,
Hank Paulson’s Fed had carved up the pie,
Saying, AIG’s too big to die,
AIG is too big to die.

Now for four years we’d been on the phone,
Selling mezzanine CDOs,
But that’s not how it used to be,
When Dick came in, we just did bonds,
Good thing he helped us right that wrong,
By buying Aurora Loan LLC.

Oh, and while the Fed was looking ‘round,
They thought they’d try and shoot us down,
The market was all broken,
Bank lending was a croakin’,
And while we unwind our trading book,
The head hunters all have a look,
The hedge funds are put on the hook,
The week the IB died.

I was saying,
Bye, bye, Lehman Brothers and I,
Needed credit to get better but the credit was dry,
Hank Paulson’s Fed had carved up the pie,
Saying, AIG’s too big to die,
AIG is too big to die…

How bad is it out there?

Lehman Brothers is dead. Merrill Lynch is adopted, even though temporarily. AIG is half in the grave. More seems to be in the pipeline. Just how bad is it out there right now?
Here is a table from Afraid to Trade, that puts S&P500's yesterday performance in the context.

It shows that Monday's performance has been 14th worst since 1950.

Now see below FTSE100's worst daily performances since 1984.

It shows yesterday's performance was 21th worst since 1984.
Not bad in either case bearing in mind the severity of writedowns and systemic importance of some of these failing financial firms. However, a question begs itself whether a single day index performance can be a good indicator of problems in the broader system. Not necessarily. For comparison sake, the market crash on 19 October 1987 was a black swan event and can not be considered in the same context to what we are experiencing now. In addition, despite being excessively leveraged, the markets are now much more flexible compared to even 10 years ago.

Here is an indicator that I think is more reflective of the severity of current crisis - it is a graph of a 3 month US t-bill yield over a historic period:

Today, the yield on the t-bill touched 0.3%, the lowest since January 1941. It just shows the magnitude of anxiety in the world markets and the resulting flow of money into arguably the safest investment.

We have already seen a sequence of events within such a short period of time, unseen since the Great Depression. More seems to be coming.

Lehman Brothers to file for bankruptcy?!

Unbelievable times... Bear Sterns went under, Freddie Mac and Fannie Mae went under...is it now Lehman's turn?! It is a rhetoric question. The difference between the former two cases is that both Bear Sterns and Freddie and Fannie were bailed out by the US government, whereas the government is refusing to provide guarantee to the potential buyer of Lehman, British bank Barclays which now confirmed to have walked away from the discussions due to refusal. Given the scale of Lehman's liabilities, it is absolutely a critical time to watch how the developments unfold.

What I fear most is the potential impact of Lehman's insolvency. What happens to the creditors of Lehman? Any sizeable bank has, potentially, a multi billion counterparty risk on Lehman. Is this going to lead to a chain effect across the industry? Click here for more.

As I am writing this, I am reading news that Merrill Lynch is in talks with Bank of America to be acquired (See here).
I can't wait when the markets open in the morning...

UPDATE 1: 5.20am - 15 September 2008 London time
Only a few hours after the initial reports that ML was in talks with Bank of America to be acquired, NYT report that Bank of America bought ML for $50bn. If I were a ML shareholder I would have run with the money, but the issue here is that it is an all share purchase and hence shareholders can't lock in to the profit. I think BoA paid too much for ML.
So, what is next? AIG seems have nearly arrived too...