Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts

Tuesday, July 08, 2025

Inside Money: Brown Brothers Harriman and the American Way of Power

Inside Money: Brown Brothers Harriman and the American Way of Power by Zachary Karabell

Brown Brothers are conservative bankers. They are willing to invest and take risks, but they do so with their own money. They have been around for over two centuries. Part of their ethos is to not get involved with too many things and work behind the scenes. They are still often involved in the "non-public" part of Wall Street. They exited contriversaral industries (such as cotton produced by slaves) when seeing that it is not the best financial investment. They helped grease international trade by providing letters of credit for those visiting other countries. Prescott Bush, father and grandfather of future US presidents was once a partner. 

The story follows a mostly chronological narrative, though does jump around a bit. Both the history of the firm as well as that of individual people and times are followed. Brown Brothers seem to be exactly what you would expect to think of "bankers" rather than the high-flying wall street types that have become predominant recently. They have relationships and influence without flash.

Thursday, October 10, 2024

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

Peter Kovac eviscerates Michael Lewis in this response to Flash Boys. He goes chapter by chapter, pointing out the problems in Michael Lewis's arguments. He points out that some of the "bad behavior" Lewis complains about is impossible - it violates exchange rules, laws or even physics. Some of the examples given in Lewis' book are just wrong. (Kovac is kind enough to chalk it up to sloppiness, rather than outright fabrication.) Other examples are correct, but have the wrong attribution. A trader that tries to sell some stock may see the market price change simply due to economics - more demand tends to increase price. Similarly, the price of Chinese ETF may change even when the Chinese market is closed due to demand from those in other markets.

Kovac spins the tables on the HFT story by portraying the traders as Davids against the Goliaths of the big firms. The big brokerage houses have highly paid employees that earn much more than those in the HFT house. They have capitalized on market inefficiencies to make millions and billions of dollars. The High Frequency Traders have helped make the markets more efficient, reducing the opportunities for the "old bot" network. Retail investors now have better trades with improved pricing. The traders that have been significantly impacted are the big hedge funds. Their easy "rent seeking" has been reduced.

Kovac does point to areas where Lewis has got things right, such as with trading types and other issues. Somewhat surprisingly, Kovac, like Lewis before him, does not provide a clear definition of what a High Frequency Trader is. (Though to be fair, he does provide more details than Lewis.) In the end, he admits that Lewis is a writer who wrote an interesting story that is a little loose with the facts. Lewis may have let his trading background color his view of the traders. Flip-flop wearing techies are not the same as Alpha-male techies.

Saturday, April 16, 2022

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness

Our modern financial system is relatively new. It has also been hit with many "black swan" spikes. The concept of "retirement" was unknown just a few generations ago. People worked until they couldn't work anymore. Today people often long for the days past, without fully comprehending everything that would entail. 

Psychology of Money takes an ultra-wide view of the economy and money. Many of the poor decisions that are made with money result from viewing things too closely. We may want a nice car as a status symbol. Other people will recognize the nice car - but are less likely to notice the person driving it. Similarly, jumping in the stock market because everyone else is may be inappropriate - especially if we are buying for the long haul while the market is being moved by day traders.

People that get upset with the system may respond with movements like the Tea Party or Occupy Wall Street. They are from opposite sides of the political spectrum, yet feel "excluded."

For advice, the author advocates understanding yourself and your goals. Just because other people are doing things does not mean you should - especially if you have different goals and time horizons. Luck plays a huge role in short term investment results. A longer time horizon smooths out the results.  A margin of safety is also valuable. You may not be able to predict what can happen, but you can have the safety to respond if your investments lose value.



Thursday, June 25, 2020

Flash Boys: A Wall Street Revolt

High frequency stock traders will pay enormous amounts to shave small fractions of a seconds off of electronic communication time. Some of this could be beneficial for computer technology if they were willing to contribute back to open source projects. Alas, they like to keep their work very secret. After all, speed helps them to make make money. By being crazy fast they can perform time-base arbitrage, acting on changes in prices in one location before they have changed in another. They even brag about the benefits of ultra-fast speed, even when it does not benefit them. High frequency traders can use the speed to "get in between" a buyer and seller, making near riskless profits.
Flashboys covers a few somewhat related stories. In one, Sergey Aleynikov was arrested by the FBI and tried for "stealing" valuable source code from Goldman Sachs. This was portrayed as an incompetent witch hunt. He had uploaded code to a public SVN repo, with little attempt to hide his activity. (He could have easily walked away with all the code on a USB thumb drive.) The code he had was a mixture of open source code with the code written at the company. There was very little of the "secret sauce" from the company. He had been somewhat disgruntled that he had been unable to contribute back to the open source community. There were multiple attempts to make him an "Example". However, it seemed that there was no real damage done. (Lewis likens his activity to keeping a notebook of meetings at a job.)
The other story is about high frequency trading. There is the story of a cable from Chicago to New York built at great cost to be straighter to save a few fractions of a second off the time it takes a signal to travel. There are a few other stories about people that worked to help colocate near exchanges to be super fast.
The bulk of the story focuses on Brad Katsuyama, his experience at RBC and the people he brought together to create IEX. He gradually "uncovered" some of the oddities of high frequency trading. He got together a bunch of idealists to help create an exchange that would be immune to some HFT trading abuses. He identified some issues, such as high frequency traders taking advantage of the time it takes an order to reach different exchanges. IEX tried to prevent this by adding delays. They identified many of other bits of challenges. One thing they identified was the constant regulation/loophole loop. It seems that abuses in the financial system are enabled by previous regulation. The previous regulation was created to eliminate a previous abuse. And the path keeps going back.
The book does not go into great detail explaining high frequency trading. It does mention the great sums of money they are willing to pay for programmers and for speeds. Some have bragged about not ever losing money in a day's trading. The assumption is that they can make a few fractions of a cent in a few fractions of a second and just multiple that into real money without other noticing they have lost.

Monday, June 22, 2020

The Secret Financial Life of Food: From Commodities Markets to Supermarkets (Arts and Traditions of the Table: Perspectives on Culinary History)

The Secret Life of Food explores the role the futures market plays in the food we consume. The United States once had many different future's markets, some of which had their own specific niches. The markets have since consolidated, with specific commodities coming and going. Successful commodities need to have sufficient uncertainty in their yield as well as a wide variety of participants. The markets define specific standards for the product being produced. Participants include producers (often farmers growing the crops ), consumers (usually large corporations that require the crops as inputs) and speculators (financial players who have no intention of taking delivery.) At times speculators have achieved great gains by cornering the market. (Though there have also been huge loses in failed attempts to corner.) The futures markets are used to help smooth costs, and help prevent wild swings in the processed food products commonly consumed. Significant sustained price swings can often take a year or so to appear in the prices of processed food.
The book provides a fascinating story of how key futures markets, such as corn, wheat, coffee and orange juice work. Equally fascinating is the story of failed markets and ones that don't exist. High Fructose Corn Syrup failed because there were too few participants. Other markets, such as Peking Duck, could be possible, but have not picked up yet. There are a variety of different markets in different countries that trade things important to their population.

Thursday, April 09, 2020

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

Thirteen Bankers describes the control that bankers have managed to btain over our current financial system. It begins with a history of banking and moves towards the "innovation" that has occurred in banking. Only a few generations ago, banking was a relatively low paying conservative industry. However, bankers introduced more and more complex instruments that allowed them to make more and more money. Bankers are also heavily involved in the regulation of banking, making it difficult to implement some needed regulation. Big banks have also become "too big to fail" The government's willingness to let institutions fail at the start of the 2009 financial crisis ended up "forcing" the government to bail out the remaining banks. There was a huge liquidity crisis that could not be resolved. The perverse impact was that the big risky banks end up getting bigger, while the small diverse banks were wiped out. "Too big to fail" banks take riskier and riskier bets because they know they can get bailed out.

Sunday, January 19, 2020

Boomerang: Travels in the New Third World

In boomerang, Michael Lewis explores some of the sovereign players in the financial markets meltdown of 2009. He plays up the country stereotypes. Iceland is populated by men that do not listen to their wive.s After conquering the fishing industry, they figure they must be naturally gifted at investment banking also. Greek are loners who think everyone else is cheating, so must cheat themselves. The Irish had always suffered, yet they had a rapid economic turnaround. They guaranteed all banks, leaving each long-suffering Irishman with a huge share of debt.
One of the final discussions deal with California and local governments. Arnold Schwarzenegger thought he had a mandate to fix things. However, he discovered that people and politicians simply wanted a lot of services and don't want to pay for them. Thus there is a lot of future debt and a willingness to shift things to local governments. These governments end up spending hugs amounts paying for their current and former employees. Thus cities like San Jose can't afford to staff new community centers. Vallejo couldn't afford anything and ended up bankrupt.
Alas governments are just behaving like individuals who go into debt to pay for things later.

Sunday, April 21, 2019

Crashed: How a Decade of Financial Crises Changed the World

in Crashed, Adam Tooze explores the interrelated economic meltdowns of the past decade and the resultant political actions. The approach is perhaps too detailed. However, in some ways it needs the details to bring out the relationships between activities in many different companies and countries. He openly admits a left-of-center viewpoint with that calls in to question some of the decisions made. (The investment bankers that really triggered the mess were the ones to quickly recover their full bonuses. The average Joe, however, often suffered through demands of austerity.) Governments often have a "built in" stimulus that triggers increased benefits (such as unemployment) when the economy takes a turn for the worse. Cutting government spending for these can further extend the pain of the recession.
The economic malaise also triggered social and political issues, thus contributing to the refugee crisis. These factors contributed to a call for nativism in many developed countries. People wanted were upset with free trade and the largess of the investment bankers, and instead wanted politicians that would focus on the home. In Europe, this led to the rise of many far-left and far-right parties and Brexit. In the US, with the entrenched 2 party system, this led to a takover of the Republican Party by the Tea Party and then Trump. The "Liberal Technocrats" consider this to just be a blip, disregarding the desires of a great portion of the populace. The end result, however, it Republicans often pushing many of the same things that they had fought against when Democrats were in power (such as "stimulus")
The book does a good job of explaining why it is so challenging for democracies to run a global economic scheme.

Sunday, March 31, 2019

Den of Thieves

In the 1980s, corporate takovers and buyouts were all the rage. Wall Street could get filthy rich at the expense of actual companies. They also found ways to further enrich their wealth by illegally trading on advance private information. Den of Thieves covers the stories of some of this trading among the people that were actually caught. White collar criminals ended up serving time in prison and paying multi-million dollar fines. Long-lived brokerage houses that were caught up in the scandal vanished. And in the end, you are wondering how many other guilty parties escaped unscathed. The book makes insider trading appear similar to speeding on highways. It is illegal, but so rampant that nobody expects to get caught. Traders could employ all sorts of other schemes (of various legality) to manufacture money, much to the chagrin of taxpayers and shareholders. Have times really changed since then? 30 years later, wall street has changed, but still suffers from the greed complex outlined in the book.

Thursday, February 21, 2019

Einstein of Money

Benjamin Graham was patron saint of value investing. His book, The Intelligent Investor, still pops up on best seller lists, decades after he passed away. Other investors, such as Warren Buffett see him as a significant influence on their investing style. Graham's investing style puts the focus on long term value, regardless of short term market fluctuations. Depending on the dedication of the investor, they can employ screens to narrow down the the list of companies to consider. (Doing these screens were much more difficult a century ago when he started investing.)
Einstein of Money interleaves the story of Graham's life with details of his investing framework. The structure almost works. However, it is easy to get lost as it shifts gears. The writing style can also be very patronizing. The author revere's Graham, and is willing to brush aside his failures (especially with women and family.) He regularly talks about Graham's strong ethics, but does not spend much time in giving positive examples.
Graham was born into a fairly well-to-do Jewish family that had immigrated to the US. The temporary time in New York ended up becoming a permanent residence. The family was initially very well to do. However, they became impoverished as the family business failed and his father passed away. Ben learned to work and study hard and value money. He ended up attending Columbia on scholarship where he studied a multitude of subjects. He expected to go to law school, but ended up with a job on Wall Street. He had great success, eventually starting his own firm and weathering through the great depression. He eventually retired to California, where he taught a class at UCLA on investing. In his "spare time", he had many interests. He wrote plays, translated a book from Spanish, and proposed an economic alternative to the gold standard. He did have trouble keeping a marriage together, and was married multiple times, eventually living the waning days of his life with a mistress. He lived most of his life comfortably, and continued to influence many investors, including Warren Buffett whom he hoped would continue to work at his firm after her retired. Alas, the "Oracle of Omaha" decided he would much rather be back in Nebraska once Graham was retired.

Tuesday, October 09, 2018

Principles: Life and Work

Ray Dalio earned a fortune building up his investment company and playing the markets. In Principles, he attempts to distill some of the principles that guided him in his life and work. He stresses that these are his principles and that everyone should have their own. The first principle is to embrace reality and deal with it. Being overly concerned with changing parts of the world that you can't control can lead to defeatism. Instead focus on what is real and what you can do. Related to that, don't get too hung up about how you think things should be. This can distract from finding out how things really are. The world is constantly evolving. You need to continue to evolve also.
The book starts with a general biography of his experience. Then he brings out his principals, starting with the personal ones, then going to the specific ones used at a company. (Most of the book is narrated by the author, though a good chunk near the end is by another narrator.) His company (Bridgewater) was extremely open, with most meetings videotaped and nearly everything shared. There were even "baseball cards" created for each employee, showing their strengths and weaknesses. Decisions were made by "idea meritocracy", with the person most able in certain area given more say in a decision. He also stresses the importance of being "radically open-minded". Be willing to understand other people's opinions - especially those that know more than you. It is more important to learn from others than to just share your belief. Meetings should also be limited to a few people. Two people together are often much more productive than two alone. However, 10 people may be less productive.

Thursday, October 04, 2018

The Map and the Territory: Risk, Human Nature, and the Future of Forecasting

The Map and the Territory is Alan Greenspan's look at the Great Recession of 2008 and the impact on the markets. It comes across a bit as "we messed up, but there were problems with our data so it wasn't really our fault." HE does have some interesting insights on entitlement programs (like social security.) Since people are paying into them, they don't think of them as "charity", even when the government provides them much more in benefits than they take out. His analysis also shows that the programs have depressed wages - primarily of lower earning families. However, these are wages that "were never seen", thus they don't have political objections. He also acknowledged that most of the economic models failed to predict the great recession. He is very conservative and finds issue with welfare states. He finds free market capitalism the best tool for raising everybody up. (But he acknowledges that there will be people that suffer from the obsolescence of their previous jobs.) Training programs can help people adapt to new skills needed. However, these programs have often been encumbered by politics. He further laments the extreme political stratification. Washington get-togethers once were balanced between Republicans and Democrats, but now seem to be overwhelmingly one or the other, leaving little cross aisle communication. (This can be seen today with the supreme court confirmation hearings - both sides seem to feel their side has "won", and have little respect for the other side.)

Wednesday, September 26, 2018

The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

The Quants is the story of some of the key players in the rise of algorithmic trading and the rise of hedge funds. These were people with backgrounds primarily in fields like Math that parlayed their skills into creating complicated models of the financial world to help make obscene riches on wall street. Their models supposedly reduced risk to manageable levels while producing outsize returns. However, they tended to rest on a backbone of people reacting rationally (adhering to Fama's Efficient Markets Hypothesis.) Alas, they often failed to account for some of the "black swans" and human behavior. This lead to catastrophic failure and the great recession of 2007.
The characters in the book come across as much more analytical than those in a book like "Liar's Poker". They are, after all, the nerds rather than the "jocks" of the trading desks. They often glory in the numbers, regardless of what the numbers are attached to. Some were leaders of big companies (like Citadel), while others were more content to exercise their might behind the scenes. Many got there start with gambling, using card counting or other tricks to help beat the odds. Wall Street is viewed as the "biggest casino" out there. (Though many also enjoy a regular game of poker.) When times were good, they made great amounts of money. And when they were not good? Well, there were quite a few companies that went belly up. The book carries on past the great recession crash, and then seems to end suddenly as our "heroes" are exploring new ways to make money.

Sunday, February 19, 2017

The Big Short: Inside the Doomsday Machine

Out of the ashes of the dot-com crash rose the housing bubble. Low interest rates and relaxed underwriting standards allowed anyone to buy a home. Loans were available for anybody, reagardless of their ability to pay. (In some cases, borrowers were encouraged to lie outright.) Lenders offered low teaser rates with options to limit payments further. They would gather fees when the loan was made and then securitized the loans to sell them to others. Borrowers would be expected to refinance or sell their property after the teaser rates expired. This system would work as long as home values are rising. However, once the prices start to fall (or even increase at slower rates), the house of cards would start to fall as teaser rates expired.

In the early 2000s, bankers had convinced themselves that sub-prime was where the money was. They created complex finance instruments to package them together in a seemingly "safe" manner. The highest rated securities would keep all their values if defaults continued at their "normal rates". Wall street thought they had eliminated most work. Even this risk could be eliminated by purchasing credit default instruments that would pay out if the bond payers failed. These additional layers helped to mask the true risk exposure.

While most people saw safety, a few people could see the house of cards falling. "The Big Short" focuses on these people. They saw the subprime situation as a super-complex ponzi scheme that was destined to fail. However, it was difficult to take a short position in "subprime". They would invest in Credit Default Swaps as well as short stocks of banks with heavy subprime exposure. Alas, the market for swaps were controlled by the banks that had exposure to subprime. They would continue to keep the value nearly constant, disregarding the possible exposure. Despite mounting subprime problems, the positions failed to show an increase in value until the bottom fell out of the market. However, once the bottom fell out, there was a risk that the counter parties would be able to fulfill the default swaps. Due to the complexity and massive exposure, there was a risk that the entire financial system would fail. However, the government jumped in and "saved" the financial system, allowing many to continue business as usual and continue to collect their big bonuses in spite of the fact that they nearly brought down the entire economy.

The subprime crisis hurt a lot of people. Supposedly safe mutual funds had their value greatly reduced due to exposure to "AAA" subprime instruments. Many people lost their houses and many others saw the value of their houses plummet in value. Many jobs were lost. Retirement savings were wiped out. Ironically, many of the people that caused the mess continued to do fine. They had already collected their big bonuses and had little "skin" in the game. Fund manager Michael Burry, who had correctly predicted the fall, left investing for a while after the fall. Despite predicting the crisis and making a ton of money for his investors, he was viewed as somebody "outside" and not given much credit.

With the abundant availability of information, there is little "low hanging" fruit for traders and bankers to justify their huge bonuses. Thus we end up with complex derivatives to help juice yields. We saw a near collapse of the system during the subprime collapse. Is this only a preview of the full collapse to come? At one time, gold was use to help exchange goods. The coinage had an intrinsic value. Then paper money replaced the coinage. It was valued for what it stood for. (At one time it represented a gold value. Now it is just a "Faith") Today, paper money is largely out of the picture, with most transactions merely involving numbers moving from one account to another. On top of this, there are numerous complex instruments. How stable is this system?

Sunday, August 10, 2014

Liar's Poker

Before Michael Lewis was a popular non-fiction writer, he worked on wall street. Liar's Poker is the story of wall street of the 80s and his experience there. The language and the characters involved are all of the salty, unsavory types. These are not the people you would want to meet your family. They were a frat in all the bad ways. Yet somehow they managed to make tons of money. (However, they could just as easily lose a lot or see the great money-making scheme whisked away from them.) Some traders manage to be in the ideal middleman position where they can make money with minimal risk.

Lewis manage to get the job through personal connections. The procedure could be cut-throat, with the littlest thing disqualifying you for the job. His description of the interview process sounded more like a hazing. You had to rise up the ranks through force of will. You just don't want to get banished to Dallas.

Part of the the book then goes on to describe bond trading and mortgage backed securities. Solomon Brothers happened to be at the right place and the right time, ready to lead off the boom in mortgages. By bunching them together, they could get people the investment that they wanted. (Of course, a couple decades later, the whole thing would come crashing to the ground.)

After reading, I'm left thinking that "we are letting these guys manage our financial systems?" scary.

Monday, August 04, 2014

The Ascent of Money

The Ascent of money tells the story of the rise of finance as a key part of our economy. It starts with the basic trading units, and then goes on to the derivatives and the derivatives of the derivatives. As finance has become more important, people have continued to react irrationally to things. People also tend to underestimate the irrationality of others, leading to financial crises.

This book covers the rise of money in many parts of the world, from western Europe to Incan America to China. The focus is on the major events - often when one group gains or loses a large amount of money. From conquistadors to corrupt Savings and Loan owners, there is almost always somebody that tries to beat the system (often to be beat themselves by the system.) Often it is the very rules to protect that lead to future problems.