The crap called Financial Engineering and Private Equity

I have two Engineering degrees-in Metallurgical Engineering, and Electrical Engineering.
I tried to understand Financial stuff these last few years-came across words like Financial Engineering. This is crap. There's no such thing-otherwise lets invent one called "Predict the football game Engineering" or "Read your Future Astrological Engineering".

Financial Engineering is a sham. It is people using complex mathematics to confuse people into believing they know something. They don't. They sell "products"---currencies, volatility swaps, u name it. All bullshit wrapped in different bright colored packages.

Private equity is the abyss of Finance. The whole idea of capitalism and stock markets-where you loan your money to a company who you don't know personally via a stock market and a financial regulator is dumped by these groups called Private Equity who take public companies private and apply Financial Engineering to them to turn them around. Private Equity investors are probably the dumbest investors of the world. How can you take out the owners of a company and expect to improve the company? See this example of Kerry's media empire in Australia being taken over by Private Equity jokers here.

Here in South Chile there's some fund called Southern Cross, who took over a supermarket chain for $80M. This supermarket chain is owned by a family, and I know the owner personally. He was pretty happy with the offer-seemed like a nice deal. Now he is out of the company's day to day operations and these bozos from Southern Cross plan to run the company....do you think bozos trained in Financial Engineering can run a supermarket better than people who have owned it for 30 years?

Since voodoo people only respect the art of other voodoo people, that's why you have banks, central banks, etc. all in bed with these people called Private Equity. These are buyers and sellers of money; a business they don't understand much at all. They seem to buy high and sell low. That's why China invested in BX and you have these poor taxpayers in China paying for stupid investments by their Government.

Private Equity firms like Blackstone and Fortress are the highest examples of investor stupidity. They are Public! The whole idea of a Private Equity firm with Public shares is bizarre-they take out public companies and engineer them financially and then dump them back on the stock market, and for this financial engineering they can command a premium??? Investors are paying for a non-existent ability called financial engineering, just like millions of people worldwide pay for astrologers...who do use very interesting charts and complicated diagrams, by the way, to read your future (sounds like complex math of finance???).

Will tell you another time about the biggest speculators in currencies-the central banks and the treasury departments. Hint-they "defend" their currencies ---buying them when they go down.... This is not volatility reduction or market making, this is pure speculation.

Sanjay

The cause of the present financial crisis-not US subprime loans-it is unknown

The press and Governments worldwide, especially the US Government, has blamed the present financial crisis as originating from US sub prime housing loans and then "snowballing" into a bigger problem.

Just because two things are happening together doesn't mean that one is causing the other. There is no proof anywhere that the malaise in financial markets today was caused by the US sub-prime bets going bad (on part of investors and banks).

To attribute the cause to a liquidity problem doesn't say anything. Any financial crisis is a liquidity problem at heart, duh.

Nobody knows why the markets fell part this year; and more importantly, for the policy makers etc. around the world who are trying to "fix" this problem---you can't. Bailing out Bear Stearns seemed to have done it, then increasing credit to banks, then bailing out AIG, then selling Washington Mutual to Citibank...the list goes on. The end result is that the liquidity problem still continues---ergo---you aren't doing much at all to solve the problem.

They should all come out with hands up in the air one of these days and say 'WE HAVE NO CLUE WHY THE MARKETS ARE BEHAVING THE WAY THEY DO'.

A group of monkeys could get together to solve the present crisis-and it would have the same effect-none. This is no disrespect for my own species-but simply a fact that we don't know is a very good answer often times in our lives.

Long live Taleb.

Sanjay

Dallas Fed's Fisher on capitalism and banks

Here's what Dallas Fed''s President Fisher says about the banking system and capitalism:

"Paulson, the Congress and other officials will ``will engineer an appropriate recapitalization of the banking system in a manner that does not kill the goose that lays the golden eggs of the practice of capitalism,'' See full story here at bloomberg.

To think that banks are the most important part of capitalism is false. This is a snake oil salesman telling me that the most important oil in the world is snake oil.

Capitalism will do just fine without banks. It worked before banks, it will work even if banks completely disappear. I hope that at least 50% of them will-they are useless entities to scam savers of their money.

Mr. Fisher would do well to visit a Texas Instrument's Fab right under his nose in Dallas; that's capitalism. If Adam Smith were alive today he would be proud to see division of labor and capital being employed so well as in a semiconductor manufacturing facility. And I would bet that he would be aghast at how little the banking industry has progressed-and probably even has gotten worse since his times.

Banks were designed to put capital of savers to productive uses-not to loan for houses (a consumption expense, see Adam Smith-houses are not investments, they are consumption loans), real estate or play with derivatives.

Markets will be back-but I hope that the pension funds, the corporate treasurers, and the mom and pop savers of the world will come out smarter not to trust the banks as much as they did before. This will be very good for capitalism-capital will fall into better hands, hands which will allocate it better for the benefit of all. And it will eliminate more of these useless overpaid middlemen called banks.

But to see an important guy in the Federal Reserve talk about the importance of his own profession or of his cousins is funny-you see now that astrologers (they do have Economics and Finance degrees, two disciplines closely related to Astrology. To be fair and not to sound like I am picking on them, Psychology, Sociology, Political Science, etc. fall in the same camp) have risen to the highest levels of Government-and central banks and their staff seem to have quite a few of them.

Sanjay

The present credit crisis, and some advice to banks

At this stage in the credit crisis in the US and the developed world, even farmers are finding it difficult to find credit. This is a banking system gone completely stupid. Here's some advice to the central bankers and the banks of the world.

The most basic human needs are food and electricity. People spend money first on food and on keeping their houses warm/cold, and a good government should also make sure that the prices of these commodities are low-not by artificially controlling prices, but by increasing their production.

Credit must flow freely to farmers-the worst thing is if they cut down on food production. Chicago grain prices are at levels where it is not making sense for farmers to plant more. These prices are set by ponzi hedge funds who are trend followers-they buy high and sell low, causing increases in volatility. They are going bankrupt now, and selling wheat and soybeans at production costs. These prices will go up soon; however, the longer they stay lower, the more hesitant farmers in the US will become to plant in the next season.

Because central banks and banks are based often in big cities like NYC and Washington DC, they seem to be happy loaning funds around where they are-in big cities. To bail out housing in suburbs of Washington DC by putting capital of banks or tax payers in mortgages, or to help farmers plant more food? The answer is obvious. Even commercial paper of corporations should rank lower than helping finance farmers to plant more food.


Sanjay

Great buying opportunity

The fear of credit crisis has them throwing stocks out like toilet paper. Mosaic fell 40% the other day-it now has a P/E ratio of 4. Same holds for pretty much the coal sector (ACI, BTU, MEE, CNX) and the iron ore sector (RTP, CLF, FMG.AX) They large miners (RTP, BHP) are down to P/E's of 8-10, with their stocks trading at half their highs. Energy stocks (XLE) are down also to the same P/E's.

Do you think that even if the banking industry of the USA was to totally disappear-that these companies mentioned above will stop selling their extremely useful products? Maybe people will resort to a barter system-exchanging oil for software-but the world will go on. That the financial crisis can cause a long term downturn in the US economy is absolutely false-a fall in the economy for a couple of quarters, as happened in Argentina, or in Korea and South Asia in the Asian crisis of 1998, can happen. But long term-financial crisis DO NOT have the ability to take down the whole economy. Of course the merchants of that sector (banks) will tell you to believe otherwise.

If you witnessed the crisis in Argentina-you saw the big down on that market-eventually for it to rally back up. Goverments come and ago, but companies stay. The stock market stays. The world economy and the US ecoonomy is much larger than the US financial sector, and life goes on.

Buy on margin and in a couple of years from now these prices will look like the sale of a lifetime.

Sanjay

Bizarre repercussions of Lehman bankrupcy

The only word which describes what is going on right now in the markets is "Bizarre".
Take a look at this story-this sums it up really well. Great job by Tom Cahill at Bloomberg.

To tell about assets of hedge funds being inaccessible, being stranded in Lehman accounts. To tell about a stake in UBS worth $1.3 Billion being stuck.
Words like inaccessible, stranded and stuck are not used for assets of a third party. This is truly bizarre.

It is understandable that assets of the firm itself are seized, but the Government should make sure that assets of third parties are available fast for trading. This is nothing to do with Lehman-this is a Government's responsibility to honor that assets held even at a failed firm-as long as the assets are simple in form like stocks, bonds, simple call and put options trading on exchanges, etc or cash be completely accessible to the clients of the bankrupt firm.
There is a limit of course-like the $100K guarantee by FDIC, but still-stocks and bonds held at a firm should be monitored by the Government and such a thing is absolutely a loss of faith in the Government's ability to do basic stuff-respect right to property and assets.

If this goes on longer and assets of third parties are frozen in Lehman, you can bet that the Governments (US, UK) will be sued and they will pay through their noses for this strange, bizarre development.

Maybe allowing Lehman to fail was not a good idea after all-the Government should have taken over as it did Fannie and Freddie. Because they now have a very very difficult situation to deal with.

Sanjay