Sergiy Gorovyy

Thoughts on the financial crisis

Tue, 07 Oct 2008 05:49:17 GMT

I didn't write entries for a long time, but now I just have too many ideas to share, just because otherwise I will forget them. So:

As you may know, there is a financial crisis now in US in particular and in the whole world in general. Those of you who know more about the matters, know that it started from the CDS - Credit Default Swaps. The biggest world financial institutions (mostly US, just because US had and still has the largest in the world financial institutions) were selling CDS on bonds of companies. Short explanation - CDS contract - it's in fact an insurance of a bond of some risky company. For example, institution A bought a bond from some institution B, but is afraid to loose everything, in the case, when institution B defaults, so it buys from C an insurance, which is paid if B defaults. There are several problems with the way the trade of these securities is organized. The first one - it's an over-the-counter operations, so there is no free market, where everybody can see prices of the securities and that's why nobody knows now how much they are worth. Another problem is that in the contract you don't need to have the bond from the firm B in the first place, so it is just a bet on the default of B. This allowed CDS market to become larger than the bonds market itself and this size added tremendously to the problem at hand.

Now this was just an introduction containing information and thoughts available on TV. My thoughts are additional sources of risk coming from this operation and from operation of insurance system as a whole. In fact, CDS is just a life insurance on a company B. If it defaults (dies) firm A get a payment from firm C, but before that firm A pays premiums to C. The only difference from life insurance is the fact that it's on another name. Now just imagine a situation when your neighbor buys a life insurance on your name, meaning he pays money to some institution if you are alive during this year or collects the principal if you die. Would you start worry about his intensions? He's got a pretty good incentive to make your life shorter. That's my first point, that goes to the fact that you don't need to have bond, to buy CDS on it.

The second point is about the life insurance system as a whole. Yes, when the death are more or less independent, insurance companies work fine, because they collect premiums, pay principals, that are usually less (or much less - depends on the level of development of the country and of the level of competition) and prosper. Now imagine for example a case of plague or some another event that leads to simultaneous death of significant portion of population. And here it may mean in fact 1% or so. The idea is, that then insurance companies (especially in the most developed countries) will not be able to pay principals, so basically they will default on their obligations. And this will bring a collapse of the insurance industry in the first place. Then all the connected industries will suffer. On the other hand there is a huge incentive from the market to establish an insurance company that will pay a lot in case of a such catastrophic event (or at least will say that it will pay). The incentive in standard life insurance calculations can be expressed like this: small premium, high principal and a very low probability of an event, so when there is no such events or they are extremely rear, the company prosper, but when there are numerous insurance events, the company simply defaults. An example: an insurance from death from being struck by a meteorite that costs $1 a month, but will pay $1,000,000 in case of the event. Now in the good times (regular times), the company or just collects money, or have one person being hit, to whom it pays. Obviously that's a good time for the company. Now imagine, that a meteorite shower strikes the Earth. Numerous insurance events and the company defaults instead of paying to the people in need, so basically it doesn't fulfill its premise. Practically, this means that there is an incredible will from insurance companies to insure from such rare cases, that only "once in a lifetime" happen. Now "once in a lifetime" is in quotation marks because it's a quote from a former FED's chairman Alan Greenspan. And exactly such an event happened - Mortgage crisis. In fact the reason was quite simple - at some moment interest rates on adjustable mortgages that decreased before, stopped to decrease. There were several schemes, one of each was just a rollover of mortgage in a hope to get a lower rate in several months. The reason's for the mortgage crisis will be discussed in the next paragraph. Here I just want to finish with CDS. The biggest financial corporations were playing a role of insurance companies selling CDS on companies with a very good rating and collecting premiums. This was a profitable business till the moment when these institutions had on their hands mortgages that started to default, because people who took them could not fulfill them. Markets noticed that there is a high demand on too many CDS on some leading companies, that were deemed invincible, so their prices grew. It had very important consequences - the CDS spread increased. In fact, it was increased for some time during the mortgage crisis, but nobody really cared. It's like those who trade equities don't know anything about other instruments and vise versa. But then rating agencies noticed this and decreased ratings for some companies. The market itself also discovered too high CDS spreads and dived. This led to lower market values of the firms, which is in usual calculations for probabilities of default, where they are compared with the total liabilities. This means an increase in the probabilities of default, higher CDS spreads and continuing dive in the market price. Another moment is that lower rating means higher premium needed to pay to get money. Which itself helped the dive. This way "once in a lifetime" event led to a collapse of financial institutions that played a role of insurance companies, having tremendous value of principal to pay, that they just didn't have and couldn't borrow.

So how did this Mortgage Crisis started, that triggered the crisis? In Bill Clinton's time democrats decided that they want to provide houses to those who can not get them. From the market point of view there is a good reason for that - their income doesn't allow to have houses they wanted. Still, democrats decided to improve people's life, which is a great cause itself, when you can back this with your own money. In this case however Fennie and Fredie were encouraged to provide subprime mortgages, meaning basically mortgages to the people who can not repay them. The amount of mortgages obtained grew, so the interest rates dropped till the point when the market was satisfied. Before that one of the schemes regularly used was rolling over the mortgage, which led to a decrease in an amount needed to pay buy the people who took it. However when the drop of interest rate stopped, this scheme, as others stopped to function and people had to pay mortgages. As some of them were unable to do so, they defaulted, which triggered an increase in interest rate, which in turn triggered even more defaults.

In a conclusion, the financial crisis today is a result of a time-bomb planted in the Clinton's administration, that exploded and triggered even bigger CDS time-bomb planted in the George W. Bush's term. If you look at the economic polemic now, it's like under democrats the country prospered and then it fell under republicans, while in fact, from the business cycle theory we know, that it just happened so, that Clinton's terms were in the upward trend in the business cycle, plus the providing of internet and an increase in all businesses connected with internet. At the top there was the ".com" bubble, So if you look just at the wealth of an average american, it increased substantially during Clinton's terms, but then the ".com" bubble bursted, "9/11" happened, which also could have been plotted before Bush became a president, but I don't know nearly enough to write on this. Just a thought that a global terrorist attack takes some time to plot, which can be bigger or smaller than 9 months that Bush was in office. And in the end of Bush's term we have this crisis. It's like people praise the one who plotted bombs and dislike the one who exploded them. From my point of view, they both did enough to be blamed. So who will trigger the next bombs and who will be blamed later on? The one that should be mentioned is the Social Insurance. Another one is Healthcare, especially because democrats think that governmental insurance is much cheaper to do than the one that can be purchased on the market. Then it will take another "once in a lifetime" event to take economy down. For example - aging babyboomers, who will start to collect benefits soon. This is an often mentioned point, but I still can mention those babyboomers again.

Mon, 28 Apr 2008 04:21:05 GMT

Очень много хороших шуток! Особенно для людей знакомых с компьютером и английским языком :)
Ориджины - Origins Там 50 страниц коротких и в большинстве своём очень хороших высказываний, так что заходите, не пожалеете!

Кто такой Юзер или система по понятиям.

Sun, 20 Apr 2008 14:55:09 GMT

Начало скопировано из чужого поста, а продолжение - сам. Если кто что придумает добавить - с удовольствием сделаю.

• Юзер - человек, наступающий на грабли.
• Чайник - начинающий Юзер, ни разу не наступавший на грабли и потому уверенный, что граблей не существует.
• Ламер - Юзер, регулярно наступающий на грабли, но по-прежнему уверенный, что граблей не существует.
• Узкий специалист - Юзер, в совершенстве владеющий наступанием на одни и те же грабли.
• Широкий специалист - Юзер, имеющий на лбу более двух шишек.
• Программер - тот, для кого в наступании на грабли важнее всего результат. Устав наступать на чужие грабли, изготавливает свои собственные.
• Продвинутый программер - программер, наступающий на каждые грабли не более двух раз.
* Копирайт - концепция, ограничивающая количество доступных для наступания граблей финансовыми возможностями юзера.
• Геймер - тот, для кого в наступании на грабли важнее всего процесс. Обычно не способен изготовить собственные грабли.
• Читер - разновидность геймера; наступает только на грабли с поролоновыми насадками на ручке и обычно не больше одного раза.
• Хакер - тот, кто способен наступить на грабли, даже если они спрятаны в сарай и заперты на замок.
• Хакер - идеалист - благородный борец за право каждого наступать на неограниченное количество граблей.
• Microsoft - корпорация, всемирный лидер по производству граблей.
• Билл Гейтс - мифическое существо из программерского фольклора; злой дух - покровитель граблей.
• Апгрейд - процесс перманентной траты денег на покупку все новых граблей, каждые из которых бьют больнее предыдущих.
• Бета-версия - версия, в которой грабли видны невооруженным глазом
• Альфа-версия - версия, в которой ничего кроме граблей не видно.
• Релиз - версия, в которой грабли присыпаны листьями.
• Совместимость версий - принцип, позволяющий новым граблям попадать точно по шишке от предыдущих.
• Ассемблер - язык программирования, позволяющий наступать на грабли несколько миллионов раз в секунду.
• Локальная сеть - технология, позволяющая получить по лбу, даже когда на грабли наступает кто-то другой.
• Интернет - технология, позволяющая наступить на грабли, находящиеся на другой стороне земного шара.
• Сетевая конференция - технология, позволяющая каждому наступить не только на свои, но и на чужие грабли.
• Русские кодировки - подарочный набор граблей для пользователей Интернета.
• Дружественный интерфейс - резиновая накладка на ручку граблей.
• Гибкий (настраиваемый) интерфейс - накладка на ручку граблей, которую можно двигать, подгоняя под высоту своего лба.
• Графический интерфейс - грабли, позволяющие регулировать цвет и интенсивность искр после удара по лбу.
• Ненадежная система - грабли, которые бьют вас даже тогда когда вы на них не наступаете.
• Надежная система - грабли, которые бьют вас по лбу, даже когда вы стоите к ним спиной.
• Многозадачность - концепция, позволяющая наступать на несколько граблей одновременно.
• Объектно-ориентированное программирование - метод изготовления граблей по принципу матрешки.
• Мануал - книга, описывающая различные способы наступания на грабли. Никогда не используется ламерами и хакерами. Продвинутые программеры используют ее после того, как наступят на те же грабли во второй раз.
• Техподдержка - служба, дающая советы, что делать после наступания на грабли. Обычно первый ее совет - наступить на грабли еще раз и сравнить ощущения.
• Linux - альтернативная система наборов граблей. Каждый себе делает свой причём бесплатно
• Ubuntu - система граблей которая явлеятся одним из вышеуказанных альтернативных наборов, над которым в поте лица работают программисты и некоторым из них за это ещё и платят
• Apple - компания которая поставляет компьютеры только со своими граблями
• Второй монитор - средство отличия программеров от ламеров. Ни те ни другие не знают что с ним делать.
• Третий монитор - обострённый случай второго монитора.
• Web-камера - грабли позволяющие другим видеть ваши шишки
• Удалённый доступ - способ использования граблей так чтоб они били другого.
• Сервер - склад граблей с большим колличеством замков и хакеров у которых есть от них ключи.
• Шифрование - система при которой сообщение ламера могут прочитать только он, адресат, хакер создавший систему шифрования, хакеры купившие у этого хакера систему дешифрования и правительство купившее у одного из них её по дешёвке с таким колличеством бонусных граблей, что использовать её правительство уже не может
• Рабочий стол - идейная основа Windows. Позволяет юзерам наконец-то писать на рабочем столе всё что вздумается и при этом уборщики не будут ругаться
• Уборщики - люди жизненной целью которых является уменьшение отрицательного влияния программистов на окружающую среду. Это включает в себя вытирание пятен от кружек с кофе и выбрасывание различных вещиц содержащих большое колличество граблей внутри себя. Второе обычно негативно оценивается программистами.

Fri, 18 Apr 2008 19:25:06 GMT

Now it's 27 degrees (C) outside (80 F)!!! It's warm and sunny and beautiful!!! Obviously I mean not the nature, but too many girls with too little cloth outside :)

Small addition: In the morning I had to wear a jacket, because it was about 14 degrees (about 57 F) outside.

P.S. I'm going back to Kiev in august, so whoever reads my posts and wants to see me - let's do it! :)

Now I'm back to study, because how I explained already it was impossible to study outside :)

Ukraine, NATO and the rest...

Sat, 05 Apr 2008 01:25:16 GMT

Even with Bush's backing Ukraine wasn't allowed to enter NATO... That's sad, because this would allow Ukraine to decrease it's enormous military which is a huge burden for the budget. Russia's governmental terrorism works again... They supply gas and oil to the Western Europe and with today's prices this allows them not only to make enormous money but also to demand everything they want. Since for Ukraine Russia is basically tho only supplier of these resources, I wait for the government to realize that it's time to invest into the alternative energy sources and to decrease taxes on alternative energy related projects. This is especially important because even oil and gas are used so inefficiently back home, that all the money Ukraine makes go to Russia as payment for these resources (apart from the money that go to the several Ukrainian oligarchs). This however doesn't immediately make Ukraine a poor country as Americans for example think about us. We eat well because food industry is the backbone of Ukraine. There are also some other industries (pipe production for example), but obviously not enough. Since people need a job, they go to the other countries for work, but not sit at home and get governmental subsidies as in many "developed" countries.

If to consider world a class, where students are countries, then there will be a group of wealthy students, who eat in their personal restaurant, wear designer cloth and pay a little to the guys that serve them. Then there is Russia - a boy who by accident was born a girl (It was a boy in the very beginning - Soviet Union, but then he lost some parts...) Anyway, this girl wants to become a member of that wealthy group but doesn't understand that for this she has to make money working hard but not by harassing others and taking their money. In this classroom Ukraine would another girl that is always harassed by Russia, but big part of it still loves her and is ready to give the last she has without care about it's personal benefit. This part even wanted to separate from the girl, but fortunately Ukraine was clever enough not to continue the dissolving process. There is an old saying: "Where there are two Ukrainians there are three getmans (good enough translation - presidents)". This means that if now there are 47 millions of Ukrainians then we are capable to create at least 47 million of new countries. This can make "Who wants to be a millionaire?" a real challenge :)

Fri, 04 Apr 2008 00:58:03 GMT

Funny day today - I found a mistake in the midterm's proposed solutions, so I explained this to the TA. It took a lot of time and I left him confused, even so I honestly tried to be as clear as possible. If I'll see the professor tomorrow, I'll try him :)

Note: 3rd floor, quiet room - free food in the morning. This means double happy hour. For those who don't know, on the Thursday there is a happy hour night for B-school students. Not that good food today, but sometimes it's quite tasty. In any case it's free, so all people who know what is arbitrage can not miss it :)

Thu, 03 Apr 2008 01:56:17 GMT

With all this classes I completely forgot about the April''s fool day :)
The last problem from macro homework - that's something. I spent 4 hours on it!!! Beautiful problem! (Those who understand beauty as I do - it's to have a solution on 3 pages, but so much complicated that you feel as after a very good research :) )
Apart from that - I'm staying in NY for 2 months. So I'll go back home just for August.

Wed, 02 Apr 2008 02:40:11 GMT

Really a warm day today! And a crazy rally of stocks today on a news about legislation giving even more power to the Fed. UBS... that's the first time I saw stock going up after an announcement of a huge writedown. It makes UBS a leader now in this category. And Lehman cashing shares? All this talk about them not having problems sounds a lot like Bear Sterns story to me. If they don't have problems why to get a cash in a market if assumed stock price by fundamentals is high? This would mean a very poor deal, but seems that nobody think about it... Just checked what I said before about VISA... it still holds, but not that good... Let's see if I war right. I wasn't completely right, because I thought the the spike will be very short. It was short but not that short.

Tue, 01 Apr 2008 02:08:08 GMT

The forecast says that tomorrow the temperature will be in the mid 60s - that is about 16-17 degrees centigrade. So it's going to be warm!!! :)

Ok that was a very short line and now I'm returning back to the homework.

Mon, 31 Mar 2008 01:38:14 GMT

Amarok rules!
It's not amazingly good music player - it still lacks some modifications - like for example, an ability of changes in tags of .m4a files. But other than that I didn't find any problem so far.
For those who don't know, Amarok is an Open Source music player (like iTunes for example, but better). Since it's an Open Source, it has many capabilities to modify everything inside - not only look and feel, but menus for example.

Since I installed Ubuntu on my laptop, I'm definitely becoming a fan of not only Ubuntu but all the supporting or compatible software.

Just a regular day

Sat, 29 Mar 2008 20:28:56 GMT

Nothing fancy today - I'm doing homeworks all day long...

I had a lot of fun yesterday - A good midterm and then a lot of time with my Stevens's friends. As a result I know that I'm really bad in bowling :) But even I was able to do two strikes in a row :) That was happy coincidence, that happens one time on a million, but nonetheless, it happened!!! :)

Great weekend to everybody!

Fri, 28 Mar 2008 12:58:24 GMT

A big day today - I have a midterm in Financial Econometrics that I waited for long. And by waited I mean sometimes prepared :)
Then there is an event which Thom as I heard, registered as : "Bowling with the Freaking SSM" :) I can not miss that!!! :)

Thu, 27 Mar 2008 16:09:28 GMT

The AT&T messed up a bit - they sent me a phone without memorizing this, but since I really wanted to switch from t-mobile I called them and informed that I want to activate my phone :) 5 bars in my place -> from this moment on I will be able to actually call and to answer the calls!!! YAY!!! :)

Thu, 27 Mar 2008 00:59:26 GMT

Ok, that's the healthiest week ever! Three days in the row I'm going to a pool and do 60 pools there. The best thing is that it's not only healthy but also refreshing. I'm a pool fan now :)

Tue, 25 Mar 2008 17:17:34 GMT

A very strange day today - I woke up, went to class, returned to my place after the class and went to sleep :)

Another strange thing - my new phone is delivered through DHL and now it sayd on the shipment tracking:
"Shipment arrived at incorrect facility. Sent to correct destination. " :)

After another class I again did 60 pools (approximately 3 km). That's like a standard now. What can I say? I like to swim! :)

Tue, 25 Mar 2008 01:31:19 GMT

Ok, Spring break is over. The classes just started and I already have to submit a homework tomorrow, that I finished today and on the friday I have a midterm and then - bowling with SSM. Back to the normal life of constant education :)

Btw, asset pricing rules!!! :)

Mon, 24 Mar 2008 01:50:15 GMT

I had a really nice date today. The weather was gorgeous and the Central Park - beautiful! :)
I had a wonderful walk there today.

New Photos

Sat, 22 Mar 2008 16:50:09 GMT

I've just posted new photos from yesterday on my vkontakte page, so everybody who have access - welcome!

If somebody knows a free photo upload service, please send me a link! Cause I used fotki.com, but it's not free, then I tried yahoo photos, but it closed soon.

Newsflash: From today I'm an AT&T customer! The t-mobile period reached its logical conclusion. Really, even so the t-mobile is the cheapest service, I have no service nor in my place nor in mu cube, so now I'm curios why didn't I do this earlier? :)

Fri, 21 Mar 2008 23:33:37 GMT

A really good combination of rest and work today - I did the financial econometrics problem set (almost) and met my friends - Alena - a former classmate from Kiev and two friends from the Stevens Institute. I wasn't stupid/brave/putanythingyouwanthere enough to go on the top of the Empire State Building on this windy day, so we with Sasha weighted downstairs, but when the guys returned I took them to the Columbia campus and showed the surroundings. Guys, it's just gorgeous! There were no people (Friday night, he :) ) so we did some cool clear pictures. I'll post them as soon as I get them.

Now I'm going back to study and then - to watch Stargate Atlantis :) Correction: No Stargate Atlantis today - the season is over, so I will watch something else :)

Fri, 21 Mar 2008 02:56:53 GMT

Today I made a trip to NJ again - saw the guys, watched weird comedies :)
Then I also watched a movie called "Lilya 4-ever". That's kind of depressing movie about the sex slavery (but how can it be happy???). Anyways, good movie, but not for a date! :)

Thu, 20 Mar 2008 03:50:08 GMT

A great rest today!

We went to a south Indian place today. Quite an interesting experience. Indian food is not as spicy as I expected. It's good in fact.

Other than that - I will continue to prepare for the Financial Econometrics midterm.

A Continuation of an attempt to write each day

Tue, 18 Mar 2008 23:04:24 GMT

A great rebound for Lehman! Just selling Lehman yesterday and buying today it was possible to make a fortune just with this stock. What can I say? my prediction - it will jump a bit back as people who bought today will just collect their gains. Oh during a day there is definitely a momentum. Another news is the today's IPO of VISA. Even so that it has nothing to do with the credits itself - it's just a system of cards and is an intermediate between people and lenders, this IPO will not be successful today. Ok, it will rise initially, but then it will drop. And the most important question for VISA - the money they will obtain by this share issue - because of the market's turmoil they will get much less than a year ago, or in a year. Doesn't sound like a smart deal.

Tomorrow I'm going back to the pool. That's all folks! :)

St. Patrciks Day and Bear Sterns buyout

Mon, 17 Mar 2008 14:28:37 GMT

Today is the St. Patrick's Day - everybody in NY have to get drunk, otherwise the St. Patrick will be unhappy :) From this point of view I'm a huge disappointment for him :)

But the biggest news today it's Bear Stern's buyout by J.P.Morgan. On books Bear costs $7.7 billion but JPM buys it for $240 million. Investors there are ecstatic about the JPM action and think that they got an incredible value buy this deal, but I think that the reason are those derivative papers in footnotes of the books. At least yesterday they said that they looked together at the books and came out with the $2/share. That's incredible! This means that the information the firms supply to the market is so much different from the truth (Just days ago it was traded at $50/share). That's something... Is Lehman the next? And what is that about Fed covering $30 Billion less liquid Bear's assets? Is this like a present to JPM? Or does this mean that in fact Bear is bellow 0 and this is just an addition to make JPM buy? Then it's just unbelievable!!!

Tv listings

Mon, 17 Mar 2008 01:26:20 GMT

From the interesting stuff today - I created my tv listings guide at http://tvlistings.zap2it.com . Now I'll be able to see what's on tv also from Ubuntu (I have a software for Windows that was together with my tv-tuner which does the same). The most important difference of this site from the previous sites on the list is that it allowed to add channels from different source to the list of favorite channels, because it happened so that there are 2 lists - Columbia University and Teachers College. I have part of one and part of the other, so I wanted to make the list corresponding exactly to my tv channel lineup.

Happy 3/15! :)

Sat, 15 Mar 2008 20:00:30 GMT

Oh my god! I missed the Pi Day! :) That's 3/14 :)
People have to be crazy to make it a holiday :)
That's why the subject of this message is happy Olga dates Luca.3/15 :) 315 is also a number. and 3,15 is a number as well, so why not to celebrate those? :)
I think the roots of this problem come from the long developed culture of geeks praying on the Pi - I mean people who study like the first thousand of digits of pi or something like these. I'm sorry for these asocial people. But who knows, maybe that's kinda fun for them to do that?

Anyways, the best date system is the one which puts the year first, then month and then - day. In such system alphabetical classification is also chronological. I mention this because I remember how I liked first the US system with month going first and how everything messed up the next year.