Technology & Finance

Sunday, November 30, 2008

Falcon Superfast PCs -- From Gaming to Trading?

Falcon has been pushing their fast PCs as a tool for the trading room, hoping for a story in Securities Industry News, but I wasn’t able to find a high-performance trading shop that was using their machines. Townsend Analytics, one of their references, said they had merely borrowed a couple of PCs for a trade show.

So I was impressed to see that CNET found Falcon to have one of the fastest PCs they had ever tested...but they looked at the machine as excellent for running games and multimedia editing. At $8,000, it is not a cheap deal, but it beats Alienware.

Interesting review—wonder if any traders will try it out?

Wednesday, November 26, 2008

Finetex Goes Live with 4th Story Latency Measure

Fixnetix, a leading provider of ultra low latency market data, has gone live on 4th Story’s 4S.Cascades, its market data feed diagnostic product.

Comparing two or more feeds in real time, 4S.Cascades provides key metrics, including relative latency and conflation in multiple tabular and graphical formats.

“4S.Cascades gives us a highly intuitive real-time graphical view of the quality of our feeds. They’ve done a great job with this product and it has been a very welcome addition to our monitoring tools,” said Paul Ellis, COO of Fixnetix.

As part of the implementation, 4th Story integrated Fixnetix’s low latency feeds into its algorithmic trading suite, which includes 4S.Everglades(tm) for real-time automated trading strategy operation and the 4S.Blue Ridge(tm) FIX compliant algo trading server.

Sunday, November 23, 2008

Anna Schwartz Gives Bernanke a Failing Grade

US Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke are fighting the last war, dumping liquidity into a market when the real problem is a credit freeze says someone in a position to know.

Anna Schwartz was co-author with Milton Friedman of “A monetary History of the United States,” and she thinks Bernanke is making a big mistake using tools the Fed should have deployed in 1929.

This interview appeared in the Wall Street Journal 18-19 October – showing that at 92 she is a couple of steps ahead of the guys in Washington.

“I think if you have some principles and know what you’re doing, the market responds…And the market respects people in supervisory positions who seem to be on top of what’s going on

Uncertainty “is the basic problems in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.

Lehman – “Instead of looking principled, the authorities looked erratic.”

“So my verdict on the present Fed leadership is that they have not really done their job.”

Ouch—worth a read.

How Citi's Risk Management Crashed and Burned

In Sunday’s New York Times, Eric Dash and Julie Creswell take apart the failed risk management practices at Citigroup in a detailed article that draws on extensive comments from bank insiders.

Much of the cause will be no surprise – traders overpowered the risk managers, a senior risk manager was good friends with the guy who ran the trading desk.
Robert Rubin, the former Clinton treasury secretary, gets tagged for pushing the bank to pile on risk to make more money,

Chuck Prince, the former corporate counsel who became CEO comes across as completely out of his depth – pushing for more C.D.O.s. Prince “didn’t know C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin,” says one former bank exec.  Rubin famously told a journalist in the summer of 2007 that he had only recently heard the term “liquidity put.”

The bank’s risk practice never considered the possibility of a housing downturn. The writers say the Fed presented the bank with a scathing critique of its risk management practices earlier this year.

The problems were compounded by groups and systems that didn’t talk to each other. The article quotes Meredith Whitney, a banking analyst who was an early critic:  “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”

This picture is consistent with the views I got from risk management experts when I was researching an article which will appear Dec. 1 in Securities Industry News.  The biggest source of problems was not inadequate technology but a failure by traders and risk managers to ask the right questions and a failure to look at a wider range of possible scenarios.

Put this piece in the risk management files for future reference—excellent reporting.

Friday, November 21, 2008

Mortgages – What to do?

Some years ago, during a drop in interest rates, I was at a Sun Microsystems presentation where they explained that a major mortgage lender, probably Norwest which bought Wells Fargo, found that in it could not process refinancing applications fast enough and risked losing customers. So the bank went to the holder of the mortgage pool (these were simpler times, before mortgage tranches were scattered across multiple portfolios) and got permission to offer homeowners a lower rate.  Then it simply sent every homeowner in the pool a letter offering the new lower rate if they signed the paper and sent it back.

That’s what the US needs now and various proposals are floating around to do something similar. Trouble is, bankers and investors don’t want to accept that their pool has lost value. They need to take a haircut for this to work – otherwise taxpayers are bailing out greedy investors and taking all the risk.

A Florida firm is showing how this could work, according to The Journal. It is reducing principal and resetting interest rates.

The WSJ reports: Reducing the principal on mortgages is “a last resort,” said Paul Koches, executive vice president at Ocwen Financial Corp., a West Palm Beach, Fla., loan servicer that has shrunk the amount owed on 10,884 delinquent mortgages as of Sept. 30. That is 23 percent of all the loans modified by Ocwen so far this year.

On average, such borrowers saw their loan payments drop by 20 percent to 40 percent, typically by lowering the loan balance and interest rate. Ocwen estimates that the savings for investors who own the mortgages vary from a nominal amount to more than $325,000 per loan compared with the likely return if the loans wound up in foreclosure.

Many mortgage lenders and servicers have been reluctant to drastically change loan terms, in part because of worries that would antagonize investors who own securities tied to the loans.

Unfortunately, they seem to be pretty much alone.

JPMorgan Chase & Co.’s new effort to restructure as much as $70 billion in mortgage loans doesn’t include principal write-downs, says the WSJ.
Instead, JPMorgan will sometimes base new loan payments on a smaller loan balance, while requiring that the full loan amount be repaid when the borrower refinances or sells the home. This approach lets the bank benefit from any subsequent increase in home values, a spokesman said.
But as foreclosures mount and the economy worsens, there is “a begrudging acceptance ... that this is the way things have to move,” said Sharon Greenberg, a mortgage strategist with Barclays Capital, a unit of Barclays PLC.

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