Sunday, October 12th, 2008...11:41 pm

50+ Finance Questions

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As a kid, I was somewhat of a math whiz. I was always in some kind of special math program and went from a mathlete (kind of like Jeff and Vant) to the glorious position as captain of the Great Neck North math team. But my talent in math probably had more to do with my ability to quickly add, subtract and multiply double digit numbers in my head than any kind of true understanding of mathematical concepts. In fact, I can specifically remember the moment I realized my days as a real mathematician were numbered.

It occurred as I was sitting in my advanced placement calculus class in my senior year of high school. My wonderful teacher, Mr. Cataliotti, was introducing the concept of Maclaurin series. To this point, I had been doing fine in the class but I was beginning to lose interest and had found myself memorizing formulas more than I was diving into new concepts. As I learned that a Macluarin series is a representation of a function as an infinite sum of terms calculated from the values of its derivatives at a single point, I realized that I no longer had any clue what the hell was going on. I couldn’t easily relate the concept to anything that made sense. It felt like I was reading chapter 50 of Moby Dick after having skimmed the previous 20 chapters. Yeah it kind of makes sense but why even care about the whale? I kind of quit on calculus that day. I did well enough to get by in the class (and I managed to stay in the good graces of Mr. Cataliotti with year-long banter about Yankee baseball). But I never again took another calculus or mathematics class and was content with the ability to do simple math in my head.

In the last few weeks, I’ve been intently following the markets and the economy. Although my day job is trying to figure out the digital world, I’ve spent much of the rest of my free time trying to figure out the financial/economic world. Instead of learning from Mr. C, I’ve been following CNBC, the Wall Street Journal, blogs, nightly check in calls with my pops and conversations with some knowledgeable friends in finance. But like when I was trying to comprehend a McLuarin series, I’m starting to get the feeling that I have no idea what the heck is happening. I don’t want to give up on this though. I have a gut feeling that the financial and economic crisis we are experiencing right now will be as influential and impactful on the world as the attacks of 9/11 or any other event that I have lived through thus far. I don’t want to be ignorant, and I don’t want to settle for writing a semi insightful financial blog post every now and then.

So in an attempt to stay afloat, I’m sharing a bunch of questions that I have about the credit crisis and economy. I’m not expecting to get all the answers, but I’m hoping for a few explanations, some new ideas and maybe even more questions. Please hit me up if you can help me figure some of this stuff out.

Most Important Questions
How closely is the stock market connected to the credit market?
If we avert the apocalypse, and credit markets stabilize, how will that affect the stock market?
What is the most significant problem in the credit market? Is it commercial paper?
How much of the market decline is a result of the lack of confidence and fear by investors and traders and how much is a correction of market values based on the bleak prospects of our economic future?
Is the financial crisis leading to a recession, or even a depression, or was it a recession that led to the financial crisis which is exacerbating the current situation?
What happens next? Let’s say we stabilize in the next few weeks but enter a deep recession. How does that effect banks, businesses, credit markets and the global economy?

Cyclical Economy
In this current economic example, as well as historically, it seems like the rise is gradual and the fall is sudden and drastic. Why?
Is their any point in using the Great Depression stock market crash as a comparable? Isn’t that like comparing Babe Ruth to Barry Bonds?
How far can the stock market realistically fall without an all out global failure? Can the dow hit 5,000? What would happen if that occurred?
Should companies that have an incredible P/E ratio try to engage in aggressive buy back programs or even try to privitze? If the market continues to deflate wouldn’t this option become more attractive as companies could buy back their ownership at bargain prices (granted they have the cash to do this?)
Since the government is bailing out banks and corporations in this bust, won’t banks and corporations be even more risk averse in the next boom because they know the government will always backstop them?
Is there any way to prevent such drastic swings in the economy? I assume this is the purpose of the Fed, IMF, etc. Why are they all failing?
DO we need more regulation in the future? Is there regulaiton that could make the financial market more stable?

Housing Market
What percent of people are actually defaulting on their home mortgages?
Why is it so difficult to analyze, understand and price these mortagages?
Should the US bailout the homeowners who are defaulting on their mortageges?
Won’t a recession lead to an even higher default rate or have most of the “bad/risky” mortgages already defaulted?
If mortgages are now harder to secure, won’t that limit the demand in the housing market and keep housing prices low?
If you are a first time home buyer, when is the time to buy?

In hindsight, should the Fed have bailed out Lehman Brothers?
How exactly will the Fed buy debt off of the banks?
How do they figure out the price for mortage-backed securities? Can’t the federal government just as easily lose billions as make billions if they price it wrong?
Which companies will be allowed to sell their debt to the government?
Is injecting capital into the economy through direct investment in banks the last major move the Fed and US government? If not, what is the next logical move?

National Debt
At what point does the US pay down the 10 trillion dollar national debt? How do we do that?
If the debt continues to grow what are the most likely consequences?
If we continue trade deficits can a foreign country one day “own” our government? Is that when we go to war to wipe it clean?

What is the significance of the LIBOR rate?
Why are so many securities (consumer loans, adjustable rate mortages) based on LIBOR rates?
What is the difference, and the danger in a wide gap, between the LIBOR rate and the Fed Funds Rate?
Do banks need to have more confidence in each other for the LIBOR rate to come down to more traditional levels? Once that happens will markets be more liquid and banks on more solid footing?

Credit Default Swaps
Can any bank, insurance company or financial institution create Credit Default Swaps against any bond, loan or collateralized security (no matter who creates or owns the underlying loan/debt)?
Did AIG basically blow up their entire global business over these CDS?
Did most investors buy CDS as a hedge against the collateralized loans in their portfolio or did people by CDS speculatively as well?
How exactly does the market for CDS work? How could I buy one if I wanted too?
Was it not obvious, that if securities like collateralized mortgages ever defaulted then it would be virtually impossible for any insurer to make good on the insurance? I believe this is called counterparty risk? Was it so far-fetched that this could never happen that people didn’t worry about it?
How will insurers that are exposed to Lehman debt pay off the estimated 400-600 billion owed? Won’t this cripple every company that has issued CDS against Lehman debt?
Since this is an unregulated market, what happens if insurers/counterparties just decide not to pay?

Credit Ratings Agencies
Why should these for-profit agencies have the authority to rate debt?
Why should an investor pay any attention to these agencies ratings?
How were they so wrong about collateralized debt?
When they change their rating it seems to create a huge often destructive shock in the market? Isn’t their a better way to do this?
Should a government agency help rate debt?

Hedge Funds
If hedge funds can’t turn things around quickly and post large losses this year, how quickly will they dissolve? Does it all hinge on how quickly limited partners exercise redemptions?
Why are hedge funds that claim to be market neutral getting ripped apart so badly?
Hedge funds that are down big and employ a “watershed mark” for profits might never again claim their piece of the profits? Can they sustain themselves on just management fees for the next few years?
Are high water marks and hurdles real? If so, will hedge funds ever recover?
Are the glory days of hedge funds over?

Global Economy
Did most countries over-leverage and is that why we are seeing a global crisis?
Which economies are most resistant to this global credit crisis?
When a country like Iceland basically goes bankrupt, what measures can other countries take against it?
If this credit crisis is proving the interconnection of the global economy does there need to be some kind of global regulation?
Can’t nations begin to wage financial war against each other by altering the value of their currencies, debt and lending rates?

What is the significance of the Volatility index?
How is the VIX calculated?
What does is signify?

US Car Companies
It seems like these companies were on their last lifeline before this economic crisis. Do they have any chance to survive?
If they are doomed, what are their different options? Bankruptcy, merger, acquisition?
If the big three car companies fail what othe businesses goes down with them? Is the whole state of Michigan screwed? Can we get rid of Dick Rod?
Is there a possibility of having no major car company in the United States?
Is there opportunity for a start-up car company (perhaps in the electrical, renewable fuel space) to enter the market? Or is the start-up costs just to drastic that without government incentive and subsidies it would be nearly impossible?

As I’ve been writing these questions I’ve actually also been learning many of the answers (and posing even more questions) through checking out websites such as WSJ, Minyanville and Dealbreaker, Clusterstock and many more. Surprisingly though (I know I shouldn’t be), the large majority of my answers have come form Wikipedia. That site seems to impress or surprise me everyday and it IS the world’s greatest collection of knowledge (a post for another day!).

As always, hit me up directly, through email or leave me a comment on this here blog.

  • Eugene

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