Saturday 30 July 2011

Who's to Blame for Continuous Credit Crises? MBA Finance - Arrogance of Dogma and A Generation of Highly Paid Misfits

1. In 2003, when I was asked to teach finance and investments and given a selection of "highly respected textbooks" to choose from I told my supervisor and colleagues at a business school that EVERY MODEL in said textbooks were IMMEDIATELY and DEMONSTRABLY FALSE, and asked shouldn't we instead try to teach something closer to the truth and reality of the financial markets? I was told that I shouldn't worry so much, that it was such a bother to dig out the truth or discuss the realities, and that it would best for everyone if I just towed the line because if I did come up with something new, it would be even more bothersome for my colleagues to learn this new stuff. Besides feeling like I needed to wipe the poop off my face, I was a bit surprised by this attitude but I suppose this institutuonal attitude is replicated 10s of thousands of times throughout business schools which receive their own funding, and basically, operate completely enclosed and cut off from the rest of the humanities. Business Schools which have become independent are in effect suffering from the solipsism, moral hazard and adverse selection of dogmas which have been disproven empirically and yet they sit imperially at the top of the hierarchy of reproducing "untruths" for the sake of replicating power structures for the "sons, daughters and upstarts" of the moneyed oligarchy of bankers and financiers who manage and control the future cash flows of all individuals plugged into the global financial system.

2. What to do? To not feel like commiting philosophical murder, I would start my lectures on finance and investments by declaring that EVERY THEORY and MODEL they would study and learn are DEMONSTRABLY FALSE. If this is true, then they should understand WHY they would bother learning this stuff. So, a student would naturally ask "WHY THEN?" My answer is a bit Aristotelian. I would say, "Because this is the language and parts of the culture which you need to learn if you wish to communicate with those in finance and power." I justified my stance to myself as a matter of teaching anthropology. So, in fact, I would rehearse "how investment bankers would think through problems" and students would get high marks if they could do just that. Immitation of behaviours and beliefs is not the same as an examination of the truth. Also, to do some personal penance, I published notes on our internal learning management system on "corrections" to the major textbook we were using, which happened to be in its 11th edition. I think my students enjoyed my notes which happened to get longer and longer as we got deeper and deeper into the text. My longest "note" was 55 pages (!!) for a chapter that was 30 pages long. At the end of the lecture series, I had approximately 350 pages of corrections and when I told the publisher of the textbook in question that I had compiled so many corrections, she asked me for a copy. I then said, "Why? They are obvious errors that should have been corrected long ago and anyway, it's a good test of the teachers and students understanding to FIND the errors." Smiling.


3. So, who's to blame for the continuous credit crises? The morphism points to me. And think of all those 35 year old PhDs in finance making a buck. Do any of them have a way of thinking through these problems? I am quite sure that no PhD in Finance from any of the brand named schools has contributed anything except positively to increasing the potential problems inherent in the academic models which they have studied and believe so automatically.

4. What do I propose? A Platonic solution. One where elders above 55 years having no skin in the game ask simple questions to get to the truth. A little bit of wisdom is what we need.

Isomorphisms and Adjunctions in Corporate Finance Law - Some Speculations

1. In the summer, I usually read (skim read and fill in the margins with messy notes and doodles using a Pilot 0.4 black pen--if i feel artistic, sepia is preferred) a couple textbooks relating to corporate finance law and wonder, gritting my teeth, why these authors haven't studied Hohfeld and Category Theory. I think I know why. It's a sociology of knowledge problem, so a perfectly general field which may be very generally defined ("raising money for a company") is studied in terms of extremely local rules ("limited to the laws of England Wales" or "to the US Federal securities laws and the laws of the state of New York"). The authors will then disclaim except for some purpose of "comparison" any knowledge or relevance of other legal jurisdictions, and off we go looking at and commenting on the law of the land.

2. Here's a radically lazy thought: why not learn Hohfeld and Category Theory enough so that you can translate all of the laws relating to corporate finance law into a couple squiggles?

3. Right off the bat, you'll see intensional and extensional definitions of corporate finance law (the intensional definition asserts a feature common to the phenomena under study, and the extensional definition will list the elements composing the set of phenomena under study). Those who critique black letter law as being low brow scholarship are Intensionalists at heart. But the practitioner doesn't really trust the "impressionistic observations" of the Intensionalists as being of any use to his immediate needs of knowing the Extensionalist definitions of the laws. So, exactly how does the sky meet the tarmac and tarmac meet the sky?

4. Isomorphism for Disclosures of a Prospectus and Adjunction for Universality in Comparative Law. What the Intensionalists and Extensionalists must agree on is the conception of disclosure as being a hard-datum phenomenon under study as well as some normative value and goal of overall corporate finance theory. But what is disclosure per se? Having wandered around various disciplines to bottom out this question, I guess the best and most satisfying answer comes from a confluence of theories including Ramsey's Law, Shannon's Information Theory and some bits (pun intended) from quantum information theory. The short way to get underneath the hood, is to define disclosure in terms of a PHYSICAL TRANSFERENCE in a MUTUALITY transaction. In category theory terms, this looks like: (1) an isomorphism of f:A->B, g:B->A; and ideally, (2) a naturality transformation where we have an adjunction which is really an isomorphism amongst functors. (1) gets you simple disclosures which MUST meet and satisfy Akerloffian boundaries against asymmetric information. (2) gets you to the level of comparative law systems where transactions MUST meet and satisfy the bounds imposed by UNIVERSALITY (as in universal bankruptcy theories) and HARMONISATION by deference (as in EU normative treaties or in conflict of law laws under the old common law). (1) can be illustrated by disentangling a prospectus published under US Securities law or under EU law and asking, "How can we be assured that the materiality of disclosure test has been met?" The positive answer should (and logically must) be that the isomorphism in (1) has been met. (2) is much more open to research. I can see the steps one would need to undertake to make the argument plausible and I'm pretty sure if one could do it, that it would prove to be a big contribution to comparative law theory.

Friday 29 July 2011

False Dichotomies: Intensionalists versus Extensionalists in the US Debt Default Theatre

1. One of the problems in philosophy which I have thought about for 41 years and have not got any closer to solving or resolving is the question of the one versus the many. Is reality one or many? Is it a false dichotomy? Is it a question at the heart of all mathematical theories, namely, number theory? Is it translated into the opposing camps of nominalists versus realists? Is it translated again amongst set theorists as intuitionists like Bouwer versus extensionalists like Zermelo-Frankel? And yet again amongst legal theorists as an opposition between monist-universalists versus cultural-pluralists? And the list of debates goes on and on, as if reflected and refracted on many pieces of broken glass and mirrors.

2. I suggest that if one wishes to develop theory then the optimal way is via Aristotle-Descates. This way is best for those who find it impossible to not question belief.

3. For true believers, the best is to find a way to complete the meaning of one's own religion.

4. How do (2) and (3) have anything to do with the US Debt Crisis? Well, an extreme view of either (2) or (3) leads to very similar conclusions. Using either, one will move towards the same goal of self-survival.

5. Now, consider the doubter of (2) and the believer of (3). The doubter cannot believe the US government will commit suicide and genocide by acts of incompetence. The believer believes a golden rabbit will be pulled out of the government's empty hat. So, what's the deal?

6. Anyone who has ever traded knows there is a second book that the auditors and compliance people can't quite put their fingers on. Applied to the US government, the US Treasury and the Fed have a lot more power than what they are saying to the hoi polloi. They can manufacture on my estimate at least another trillion dollars out of thin air by booking profits, monetizing gold reserves and accounting on an accrued-pull-cash-flow forward basis. These are tricks legitimated in practice and acceptable de iure. For a discussion of these techniques, see: http://www.zerohedge.com/news/stop-presses-fed-can-fund-treasury-over-half-trillion-emergency-capital.

7. So, do we have an answer to the false dichotomies? Does it matter if we don't get an optimal answer by August 2nd?

Thursday 28 July 2011

n-Financial Science Fiction: Pre- to Post-Credit Default

Some quick notes drawn from an alien planet spying on Earth's financial economic activities:

1.  If the US government, and specifically, the US Department of the Treasury cannot pay on its obligations when due then it is technically, insolvent, and it is declared in default as per the conditions set by bilateral legal agreements called financial contracts including straight bonds, futures, options, CDS and thousands of different kinds of interest-related over-the-counter derivatives. As of this moment in time, Thursday, July 28, 2011, neither the President of the United States nor congressmen or senators of the US have come up with a plan that meets even a modicum of credibility to the financial markets. As of July 27, major funds are positioning their books to take on the inconceivable--a default of US government obligations. On August 7th, 2007, we had a seizure of the very short-term money markets, in effect, the liquidity of the Western world, shrank from $600 billion per day in trading volume to notjhing, nada, zilch! The former Goldman Sach's CEO, and chief discretionary trader of the US at that time, Hank Paulson, one year later diverted $750 billion to save four big entities on Wall Street, which entities would continue to receive life support subsidises in the form QE1 and QE2, and by the grace of the Fed window, be able to trade "dead mice" (RMBS) for an astounding $14+ trillion in combined subsidies over 3 years. This profligacy of overt moral hazard can be compared to Nero playing the fiddle while Rome burned. Gold has zoomed above $1630 per ounce whence it was $500 per ounce 5 years ago. The charade of "panem et circenses" has come to a dreaded faltering halt by the US Fed as of May 6th when it announced no more QEn. That announcement has been completely discounted and manipulated by the ALGO traders on stock markets at low volumes at the close of trading (the so-called "compression trade"). The compression trade disappeared last Monday, July 25th. And yesterday, someone swallowed a very bitter pill and sold 65,000 futures contracts on US T-Bills! If this sort of trade occurs pre-default, only a sic fi writer of first rank can imagine what will happen as August 2nd comes and goes.

2. The markets are factoring between a 35 and 85 basis point hit in the US treasuries. The knock on tsunamic effect will be difficult to contain. Here are some headline inevitabilities:

(1) All sovereigns will be rated downwards except for the oil producers. The cost of capital will be driven prohibitively high for non-oil producing states. This means most of Europe except Gernany which enjoys a trade surplus will temporarily destroyed with extraordinary risk premia.

(2) Pension Funds and Insurers will be forced to move to safer bonds whatever that means in a sea of utter volatility. These moves are mandated by US Federal laws requiring that such funds hold AAA securities. So the law will have the unintended consequence market euthanasia.

(3) For similar reasons, the shadow banking sector, i.e., Money Market Funds (MMFs), will lead the pack, by complying with Rule 2(a)7 and immediately withdraw support for non-AAA bonds. This can cause genuine global illiqudity since without the MMFs 3 to 4 trillion dollars of very short term money suddenly goes into deposit and no bank, no corporate, no government can move any money since collateral lines will be totally frozen.

(4) Municipal bonds are downrated in relation to the US downgrade. This will make completely naked the 38 states in the US that are trading insolvent.

(5) if (3) or (4) occur then expect the US Fed and Treasury to pump another trillion dollars to prop up the failing Wall Street banks--obviously, Bank of America is getting near the threshold of the dead zone abyss and Citi will not be a beneficiary of any short-term chaos. Good luck if you want to play the river for a pair of aces.

We can list at least a hundred different effects a US default will cause, but all of these can be understood under a theory of Default Invariance. See my previous blogs. By the way, one the beneficiaries of the coming US de facto default is textbook publishing because ALL TEXTBOOKS ON FINANCE will need to scuppered and re-written. The ENTIRETY OF FINANCIAL DOGMA since the 1950s has proved itself to be less worthy than astrology.

Tuesday 26 July 2011

n-Unintended Direct Consequences of Not being Able to Fix US Debt Crisis; Direct Evidence of d:B->I Behaviour

1. Should have seen this coming. The CME is raising haircuts across the board on all sovereigns.

Source: http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv11-262.pdf

What does this mean? As Zerohedge points out, the exchange is doing what the rating agencies are hesitating to do, which is to down rate US government debt. See: http://www.zerohedge.com/news/cme-celebrates-americas-ever-nearer-date-insolvency-raising-collateral-haircut-treasurys#comments

2. For those non-initiated to the rites and rituals of the financial markets, you might consider that the EXCHANGE MODEL is the way almost all financial practitioners think of a completely controlled environment, with requirements that its trading members put up initial and variation margins, which in effect create a pool of assets buffeting the exchange as a whole from catastrophic collapse. So, when the exchange, in this case the CME, (where a huge volume of sovereign debt is traded and cleared) says that on this THURSDAY all sovereign margins are going up (and on US T-Bills, by an INFINITE RATE, from ex nihil 0% to 1%), this means an all endearing shift in Market Premise has occurred from pure academic unreal world theory to burning rubber on the tarmac.

3. Relation to Joe's Theory of the Invariance of Default. In terms of the Great Cycles of Default, we are deeply in phase 3 where governments are moving from Bailout [B] to Bailout [B]. In categorical notation, d:[B]->[B], where d is the universal morphism of default. We really don't need the brackets since in the end only the arrows count. So, d:B->B, is a more elegant way of describing the structure. But now consider the CME's act of raising the haircuts on sovereigns across the board. This action is not the signature of a bailout. In fact, it is just the sort of action that the private markets would consider realistic of themselves. The act of the haircut is an idempotent endomap of what we have earlier defined as part of the world of Financial Innovation or [I].

4. Thus, the CME haircut action is indicative of phase 4 behaviour. In category theory notation, d:[B]->[I] or simply, d:B->I. In words, the object-domain of bailout behaviour is being translated into private innovative market behaviour. We are now getting clarification on the meaning of the structure of phase 4. It will mean massive private market reaction. To put it mildly, bailouts cannot continue to be maintained.

Monday 25 July 2011

A Couple Predictable Unintended Consequences from a US Debt Downgrade and Default

1. Money Market Funds will have to move out of any AA US treasuries and bonds. The will move en mass. Their combined action will seize up the short term markets. Very bad.

2. The GSEs, Fannie MAE and Freedie Mac will need to fold into receivership from their current conservatorship. Now that will set off pure liquidation and cause all related debt markets to seize up. Very very bad.

3. Meanwhile the jokers in Congress and the President who's sided with Wall Street and has condoned about $7.5 trillion in bailouts to four banks over 3 years, are arguing about $50 to $100 billion.


Source: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/Debt%20Plan%20Summary_0.jpg

n-Systemic Risk of the US Fed: Can the Orderly Liquidation Authority be used to Limit the Power of the US Fed

1. Sometimes the medicine is worse than the disease. Under the Orderly Liquidation Authority (OLA) of the Dodd Frank Act, any company posing a systemic risk to the US economy may be taken over by the FDIC and properly dismembered into a "good company" and a "bad company" such that the latter retains the bad (underwater or non-performing) assets and the former retains the good (profitable or performing) assets. Nothing in the OLA prohibits or prevents the FDIC from going after the US Fed itself, although one might argue that sort of action was not explicitly contemplated by the statute. Supposing the OLA could be applied to any private company having 85% of its tradable assets or balance sheet in financial instruments, which the Fed unquestionably has, then the question is "What actions or activities has the Fed engaged in which have posed systemic risk on the US economy?"

2. Evidence abounds. This blog is not the place to itemise the evidence. But a good summary is as follows:

"The Last Remission:

According to the official figures put out by the US government, the economic "recovery" in the US celebrated its second anniversary on June 30, 2011. The "fuel" burned in this "recovery" is immense. Mr Obama's presidency has ushered in the era of $US 1 TRILLION plus annual deficits riding on top of 0.00 percent controlling interest rates from the Fed. It has also ushered in the era in which almost nothing is traded on the paper markets which is not - explicitly or implicitly - guaranteed by the government.

The fuel to keep the global financial system functioning does not stop at the borders of the US. The "Dodd-Frank Wall Street Reform and Consumer Protection Act" has just produced the first ever "audit" of the US central bank. It reveals that in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this - a total of $US 7.75 TRILLION - was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this "audit"), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that."

Source: http://www.the-privateer.com/front.html

3. If these figures are to be believed then the US Fed is the main culprit for insidiously halting the private markets and propping up at least four major banking entities for an amount which is around one-half of the total national debt! Crazy, what a public entity can do to its people while vainly saying that its policies are meant to avoid depression.

4. And who is to blame for this systemic fiasco? Shall we blame Obama, the puppet, or his major contributors ("his masters") on Wall Street? Why blame anyone at all when the rules of the game are fixed to ensure the continuation of the power, privilege, immunities and rights of the few against disabilities, duties, liabilities and no rights of the many?

Saturday 23 July 2011

Categorical Analysis of Selective Default -> The Morphism from [de facto] to [de jure]

1. Consider the achievement of yesterday's Euro Summit in Brussels where we find:

(a) €109 bn bailout funds from international lenders
(b) €37 bn in bondholders swapping or rolling over their bonds to new 30 year instruments
(c) European states to support Greece until it can re-enter the private markets.

See: http://www.ft.com/cms/s/0/952e0326-b3af-11e0-855b-00144feabdc0.html#axzz1Sq1THqaR

2. A category theory analysis as I have argued begins with the physical idea that Default Must Be, that is, that default is invariant in all possible market spaces where actors enter bilateral agreements called rather grandly, financial contracts. For definitions of financial contracts, Arrow and Debreu, who defined financial contracts in terms of two states of an infinitely contingent world, with the initial state as any particular state of the contingent world (t0), and the next state, (t1), as simply one change in the previous state, that is, as one of payment. It's important to keep in mind that t0 and t1 are two states of an infinitely complex and contingent world, but that the simple difference between the two is that the latter state involves payment. I have argued that this is not sufficiently realistic in terms of recognising the contingency of the world is embedded in the world itself (!) and therefore, cannot be logically eliminated from the contract without immediately contradicting Arrow and Debreu's first premise of that the world's universal property is contingency.

3. What does this mean in practical terms? In practical terms, default being invariant or default invariance means one needs to link any current valuation of any particular financial instrument to its placement in the Grand Cycle of Default, which we have previously divided into four logical spaces called phases:

(1) [I][I]
(2) [I][B]
(3) [B][B]
(4) [B][I]

where

I stands for "innovative financial instruments" in private markets, and
B means "bailout" in which government(s) using taxpayer funds partially or wholly replace market activities.

We have been seeing the rise of [B] since the U.S. Emergency Economic Stabilization Act of 2008, division A of Public Law 110-343. And a similar bailout for Greece and EU member states with the Euro Summit bailout agreement on July 22, 2011. See paragraph 1 above.

Therefore, we are definitely in the 3rd phase of [B][B].

4. Here's what is both INTERESTING and obvious when you translate the Great Cycle of Default into category theory notation:

(1) Every morphism between the bracketed objects is default, and
(2) Alternative paths and short cuts can be drawn between phases which are first order SOLUTIONS to typical intranet-phase problems, and
(3) Paths-on-paths can be drawn which can be thought of as higher dimensional solutions to various intra- and extra-phase problems.

(1) gives us the meaning of Default Invariance as a universal property in the form of an ambient morphism. In other words, to understand the STRUCTURE of law and finance in the context of global systemic risk, all we have to remember is that the reality of financial legal phenomena is mediated by default. And this is an observation of the de facto that continuously merges into the de iure. One can even characterise the transformative states in terms of differences in Hohfeldian legal relations before and after the default functor! this will be the topic of another discussion.

(2) These alternative paths can be private as in new legal and financial methodologies that merely replicate many of the processes of a normal phase or they can be short cuts in which case, REAL ARBITRAGE emerge. I'm happy to freely talk about the former but I'd be a kind of naive sociopath if I gave away short cuts for free. Short cuts are the basis for genuine financial instrument patents.

(3) The higher dimensional stuff ("operads") are surprisingly normal operations in a complex society. So, for example, I've worked out how one might go from phase 2 back to phase 1 by combining a couple Dodd-Frank Act provisions in a private action against a couple banks posing a systemic risk to the U.S. economy. in this example, one could combine the Whistleblower Incentives and Protection provisions (which is an alternative path from phase 4 to phase 1) with the Orderly Liquidation Authority provisions (which is an alternative path from phase 2 to phase 3) in some type of private action litigation, and by setting PRECEDENT in that legal case, it is possible though highly improbable, that we could have a morphism from phase (2) to phase (1). If it does occur, it would be an example of the translational symmetry of the LAW.

5. Flight Path through Social Complexity

(a) Supposing default invariance and the great cycles of default, is justice a higher-order operad? Probably. But what dimension specifically? In other words, presuming justice is n-categorical, what n is it specifically? I'm guessing any and all social rules don't need any more than 3-category level translation. But this doesn't say much except to say there's an upper bound to the complexity of financial-social space. So what? Much more significant would be how to determine a flight path through the four phases.

(b) By the way, a selective default is not an alternative path from phase 2 to phase 1, and is strongly indicative of phase 3 behaviour. More apparent chaos cometh.

Thursday 21 July 2011

D-Day for US Debt -> July 22, 2011->D-Day meaning Depression

1. Is July 22, 2011 on the Mayan calendar as the official start of 2012?

Should be.

2. See: http://online.wsj.com/article/SB10001424052702303763404576418231837713932.html for some details of the immediate effects of the US government not raising its debt ceiling.

(1) First, the credit rating agencies declare the US in default since it will not have the ability to pay all of it's financial obligations. Immediately, all other forms of credit linked to the US treasuries will also be re-rated downwards driving the interest rates up in credit cards, home loans, and so on.

(2) Second, the payments due from the Federal government made through the Federal Reserve will be limited to the amount is collected in tax. The estimate batted around is $140bn, although last year in July the amount of tax revenue was about $160bn.

(3) the main payments due from the Fed inlude:

(a) Aug 3: $23bn social security checks

(b) Aug 4: $90bn government debt matures

(c) Aug 15: $30bn interest payments due

(d) $467bn of US government bonds mature in month of August

See: http://online.wsj.com/article/SB10001424052702303763404576418231837713932.html.

(4) Who will not be paid? Say 44% of the US financial obligations can't be paid. That's around 600,000 to 700,000 government employees becoming walking zombies.

Restless times may turn bitter.

An Aristotelian Analysis of the US Debt Problem

1. Don't you just hate Aristotle? Here is a real academic (he studied at Plato's Academy when Plato was still alive) and does field work by observing EVERYTHING, from the heart beats of chicken embryos from which he hypothesises the existence of the living soul to the mystical exercises of the Eyptian high priests which leads him logically to the contemplative unmoved mover, which later (from the 4th century onwards) becomes the central image of the One God of the great western religions. Not only does he observe, but he writes it all up under a wholly self-consistent and original methodology that is gifted to generation after generation for 2,400 years; so much so that a lot of our way of thinking is not just irrational or rational, but almost unquestionably ARISTOTELIAN through and through. Most relatively contemporary psychologists who have not studied Aristotle really cannot even begin to define rationality and irrationality without Aristotle. I was a bit lucky to read and study Aristotle as a youngster. I wrote a junior thesis on Aristotle's concept of substance in his Metaphysics when I was 16. One teacher warned me that I should not presume that such thoughts would be completely embraced by most people. After the 1000th time, one gets bored showing how Aristotle's epistemological distinctions actally do help in solving practical problems.

2. But sometimes it's important to remember that there are some methods for solving what appear to be intractable problems. Let's briefly lay the groundwork. Here's the essential nut of Aristotle's view of that which forms the essence of law within a polis:

“constitutions which aim at the common advantage are correct and just without qualification, whereas those which aim only at the advantage of the rulers are deviant and unjust, because they involve despotic rule which is inappropriate for a community of free persons” (1279a17–2)

If we apply the above to the US debt problem, the obvious answer is that a "just" budget must aim at "common advantage" and any other proposal that aims at the advantage of the rulers (politicians and the rich) is simply unjust since it is inappropriate for a community of free persons. Common sense, right? Really? Show me where in place and time such has ever existed? Aristotle is setting up a dichotomy for which each new generation must choose.

3. Without any purply patches and obfuscations, the solution to the US debt problem means REDUCING the total debt by (1) reducing spending and (2) increasing taxes. Any proposed or actual plan which does not do both would be unjust. Does it matter what flag, party or colour this solution comes from?

Wednesday 20 July 2011

n-Financial Theology - St. Augustine's Confessions -> Secrities Disclosures and The Tensions of Time

1. Who is the most modern ancient philosopher? Probably St. Augustine.

http://www.stoa.org/hippo/comm.html

He is certainly the West's first psychologist who used his training in Plato, Aristotle, Plotinus and rhetoric to conceive of the act of writing as a serious matter converging with the truth. Simple Latin with a meandering heart in every direction. This is not just the impulse of eloquence, but revelation in terms of transforming whatever event was in memory to a form of abstraction where solutions could be freely found under an infinity of un-utterable possibilities. This movement of thought from concrete to abstract and then to abstract flights to freedom was always stimulated and contextualised by quotidian events. The angst of the particular ("Darling, show me the cash flow") is so St. Augustian, that I recommend him to financial regulators and wannabe traders. More than any philosopher since Heraclitus, St. Augustine the 93 volume universal scholar was a lead administrator and bureaucrat who struggled to find the perfect rule that would unleash the personal good. His lesson for all is that the spiritual journey is intensely personal, and that it is not taken alone.

2. I believe, I believe, I believe that the concept of disclosures as specified only for particular times as per a prospectus under US Securities shows fundamental errors about the nature of psychological truth and even more pointedly misses the point that the truth may be at first a personal revelation but unless tested and proved amongst the larger community is only partially true and partially false. Consider St. Augustine's questioning in the first book of his Confessions:


"But when thou dost fill all things, dost thou fill er us together. But when thou dost fill all things, dost thou fill them with thy whole being? Or, since not even all things together could contain thee altogether, does any one thing contain a single part, and do all things contain that same part at the same time? Do singulars contain thee singly? Do greater things contain more of thee, and smaller things less? Or, is it not rather that thou art wholly present everywhere, yet in such a way that nothing contains thee wholly? with thy whole being? Or, since not even all things together could contain thee altogether, does any one thing contain a single part, and do all things contain that same part at the same time? Do singulars contain thee singly? Do greater things contain more of thee, and smaller things less? Or, is it not rather that thou art wholly present everywhere, yet in such a way that nothing contains thee wholly?". See:

http://www.ccel.org/ccel/augustine/confessions.iv.html

Funny how the "many versus the one" problem never really leaves us. Aristotle uttered an intimation to a synthetic reduction that the "primary quality is quantity." The urge to find a universal solution may be a simple grammatical misconception, as if there is substantive correspondence between plurality and singularity. Most recent intellectual history shows this controversy in the foundations of set theory and in the sociology of law. In both disciplines, we have a type of Manicheanism where there is an absolute division between plurality and singularity. In set theory, the controversy was caste in terms of intensionality (ie, "universal properties") versus extensionality (ie lists of elements). For legal theorists, the contronsy has always centred on the definition of law versus laws.


3. These controversies are largely resolved by a phenomenology of the quantum spirit writ in categorical terms which explicitly incorporates, if not makes incarnate, the purely human DNA at birth (thus, giving us an updated physical metaphor for physical purity) to the many (90% of the entire human colony of cells being non-human DNA at human maturity). The many-to-the-one human structure over time is n-categorical, specifically, an operad. In category theory terms, f:[H-DNA]->[non-H-DNA], g:[non-H-DNA]->[H-DNA], where f is a forgetful functor and g is a free functor. An adjunction of these functors would raise the structure to any and all games of life as self-reproducing automata. Given these structures, it's quite evident that Plotinus and St. Augustine thought can be quickly sketched as self-similarities towards one great overall and all-encompassing super-structure. Note here that Lawvere, one the great category theorists, early on used Hegelian thought by analogy. Given what we've just sown, this is entirely consistent to the philosophical operad.

4. Finally, how does St. Augustine's personalized schema re the Confessions relate to modern securities regulations? One may argue that St. Augustine had a more accurate psychological vision of how truth should be disclosed to society. So much of securities law is about disclosures. But aside from an almost mirror neuronal view of disclosures where the issuer is suppose to somehow guess exactly what is in the mind of the investor, St. Augustine would not make such a grammatical ontological error. He clearly declares his own concerns and shares them with others. He is free to do so because he believes that God who sees all allows one to be completely transparent so much so that it is useless to hide. Without these metaphysical premises, modern securities laws which preach truth and transparency are utterly futile, and worst, perpetrating moral and ethical contradictions. Without a proper metaphysical foundation, it is better that we return to the unenlightened view of caveat emptor so that the buyer-investor will have the incentive to protect herself. But the world implied by caveat emptor is not leading us anywhere special, and barely keeps insatiable greed in check.

Monday 18 July 2011

And in Europe...delenda est, Baby, delenda est...

1. So, 30+ percent on the Greek 2-year bond is not enough to signal WAR? Maybe the belief in cozy grand institutions will save Europe. Sarcasm off.

n-Financial Theology

Pray! Tsunami on the long bond horizon.

Nuclear Financial Chain Reaction

1. In a nuclear chain reaction, some mass is turned into energy in a positive feedback loop so more and more energy is produced. This can happen quickly. In which case, you have a ka-boom, or it can happen more slowly and in a controlled fashion. However there is always a residual risk something in the containment system will fail, so basically, nuclear energy is safe until it isn't. And when it isn't, you have humans trying to control fundamental forces of nature. Humans exist towards the cold end of a universal temperature gradient while nuclear energy exists towards the hot end. For humans to evolve to a point where they will not be harmed by nuclear energy, well, that would be another creature altogether.
See: http://www.dummies.com/how-to/content/nuclear-fission-basics.html

2. Now what is a nuclear financial chain reaction? For our purposes, a nuclear financial chain reaction occurs when the normal bilateral symmetry of a financial contract gets re-valued for less than par but may be traded at par through a government agency. When this occurs, it is a form of deception and fraud on the taxpayer which would be self-evident grounds for rebellion if not revolution. Bankruptcy laws ex ante are intended to protect against these sorts of unjust enrichments but unfortunately, each generation needs to re-learn this ancient lesson since it is sold to contemporaries as different sorts of sheep clothing. The proposed solutions to the Greek crisis, the current form of the GSEs in the US, ie Fannie MAE and Freddy Mac, are coerced defaults, and typical CDOs all have the same structure where the forced asymmetry favours a large financial institution to the detriment of the long suffering individual financial obligors. We might call the latter "financial indentured slaves."

3. An uncontrolled nuclear chain reaction is dangerous to everyone. The same can be said about a nuclear financial chain reaction. Beautiful in theory but brutally ugly in reality.

Sunday 17 July 2011

Phenomenology of Market Theatre - US Debt Crisis Countdown to Darkness at Noon

1. Why take any view of market events when market events themselves have no particular inherent meaning?

2. It is almost unavoidable to look at the price graphs of the major indices around the world or hear about the Greek crisis, the Euro crisis and US debt crisis and not wonder about the narrative which support these events. There is something inside us that wants to fit these events into a coherent, consistent and manageable story line. The simpler the story, the easier it is for us to manage the unknown. If the events don't fit our world view, we will automatically re-interpret the events so that they do conform to our world view.

3. Ramsey's law (the early 20th century mathematician who drew out Wittgenstein from a kindergarten and died tragically young) tells us that there is no such thing as pure randomness to a sentient creature because as the creature senses more and more randomness, more and more recognisable patterns appear. Ironically, as one approaches absolute randomness, we find an infinitude of patterns. In some sense, this is a fine definition of insanity and the epistemological limit of any given reality. The more we can read into a matter, the more random it actually is!

4. Now let us enter the US debt ceiling crisis. Obama, for all his smooth talk, has simply capitulated to the Wall Street investment bankers. This is the image of the President on a dog's leash held by his Wall Street handlers. This is amazingly confirmed by the outgoing chairwoman of the FDIC, Sheila Baird, at: http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit-interview.html?pagewanted=all. Given Obama's trajectory in despoiling the nation, entering 6 theatres of war, and pretending to bargain for a $4trillion national debt reduction and pretending even further to have some kind of budget reduction plan which no one has even seen, it behooves us to speculate that his intent to further his masters' interests. Of course, this interpretive innuendo begins with the premise that a US default is good for the Wall Street elite. How? Simple. Crash the system so that all the government assets and concessions can be privatised and passed to the elite. This is the kind of thesis held by supersmart people like Professor Michael Hudson, see: http://michael-hudson.com/2011/07/the-euthanasia-of-industry/, and supersmart people usually believe the world is composed of people like themselves. For an extreme example of this conspiracist attitude woven into immortal philosophical dialog and literature, see Ivan's story of Christianity post Constantine to his brother Aloysha inThe Grand Inquisitor, at: http://www.online-literature.com/dostoevsky/2884/.

5. But just maybe events are not connected unless we consciously make them so. The greatest logician since Aristotle, Kurt Godel use to say that the future is ironically determined by our knowledge, such that we can choose to have an apparently open future if we remain determinedly ignorant. But once we know the future, it cannot be changed. Given Godel's principle, and Ramsey's law, how might we predict the future?

6. If we want an open future, we need to let go the desire for certainty. But the pain of uncertainty may be too much.

7. How might a failure to reach agreement on the US Debt ceiling by July 22nd play out?

(1) Everyone will go into denial. The fact is that it takes 9 days for a Congressional bill or resolution to make its way to the President's office. If by July 22nd no compromise has been signed, sealed and delivered to the President then we have an end game to technical default.

(2) Markets gets quiet before announcement of compromise and skyrockets afterwards. This will be mainly because of short-covering.

(3) Despite Compromise which is probably weak and temporary, the rating agencies put the US obligations on credit watch with possible downgrade.

(4) Despite Compromise, Bond vigilantes sell the dollar and US treasuries. But this is a mistake because unless there is a desire for Hairi-Kiri the big sovereign funds are likely to back the dollar. Saudi has its unquestioned support especially since Israel is preparing to bomb Iran, sworn enemy of Saudi.

(5) If technical default persists after July 23, then it's likely that the govt approved algos will support the low volume markets.

(6) If for some mad reason no compromise is reached by August 2nd, then equity markets globally will crash to their circuit breaking levels.

(7) On August 3rd, many people will wonder whether they will be paid.

8. In sum, expect all "safe" asset classes to go lunar from now until the supposed compromise. Gold to $1650. Swiss to undertake capital controls. Greece to default. And if the US goes into a technical default with no debt ceiling adjustment by August 2nd, immediately 7000 municipal bonds will be downgraded, 42 million people will get their food stamps one more time, and then, there will bank runs and since the US debt can no longer be trusted, a mass exodus will occur in the high frequency trading driven equity markets with singularities reached in 10 seconds, circuit breakers will continuously go off, and then a major clearing bank will declare itself insolvent, and then, we'll see the Orderly Liquidation Authority of the Dodd-Frank Act come into full swing. Let's not go there.

Financial Theology: A New Dynamic Model of Law and Finance where Risk is Noninvertible and Default is Invariant


See, Giles, C (July 15, 2011) "Dual Debt Crises:The Abyss that Awaits," at: http://www.ft.com/cms/s/0/1de5c92e-af0f-11e0-bb89-00144feabdc0.html#axzz1SFQfKUtE


1. Common law lawyers draw a none too fine distinction between de facto and de iure except to say that for all intents and purposes when the two collide there is a similar legal result for the parties involved.

2. Many times economists who write regulation accuse their law-captured brethren of circumventing the intent or plain meaning of the law by using technical legal forms to subvert economic substance. For example, the legal language of CDOs was drawn specifically to avoid the machinery of bankruptcy and in doing so no doubt mock the fundamental freedom thereto, or say in the heyday of Basel II, hybrid financial instruments were drawn to meet the requirements of Tier 1 or Tier 2 capital, and Basel II had specific language warning bankers not to use "form over substance." See, the relevant sections on Securitizations in Basel II, 2006, www.bis.org.

3. But we sometimes have to pinch ourselves awake and remind ourselves that whatever financial instrument is drawn OTC was made by humans for a human purpose, and that no matter how apparently weirdly alien they may be, such instruments are evidence of a human who seeks survival, wealth and prosperity. Financial instruments by themselves are not evil incarnate with any intentional maliciousness, but they may, when aggregated to form baskets of other financial instruments fail to meet the requirements of preserving the fundamental rights and duties of the individual parties to the original contracts. Financial instrument aggregations, synthetic CDOs, synthetic options, and the like, where individual obligors are treated as indentured slaves and merely as robotic units of unquestionable positive cash-flow, are the most likely to weaken the bonds of trust and confidence in a society since such financial instrument aggregations attempt to short circuit the rites, rituals, signs and symbols that generate trust and confidence in the society. Note how MERS, a creature of real estate mortgage backed securities was backed by major banks so that the documentation of financial instrument aggregators could operate more "efficiently". However, MERS simply failed to bother with the details of registering indentures and mortgages in local registries assuming that intranet-company transfers of electronic documentation would be sufficient for the bond investors, but failed miserably in terms of the absolute local legal requirements of registration. In a word, MERS successfully accomplished fraud.

4. Our new philosophical and anthropological theory of law and finance recognises that

(1) Meaning is a quantum mechanical event. Thus, how we interpret states of the market matter just as in physics, rigid bodies matter.

(2) Risk is noninvertible. This means that risk has an asymmetric direction that cannot once assigned return on itself directly. In geeky language risk is non-Abelian. However this does not mean that it cannot be made useful as a factor in prediction. For example, Bayesian methods of probability combined with certain features of behavioural finance theory (specifically, prospect theory) can make rather accurate predictions during certain narrowly defined episodic scenarios of the open markets.

(3) Default is invariant. Of course, we do not mean this de jure, but rather de facto. By keeping default invariance in mind, we find categorical simplifications in terms of the structure of law and finance applying to both micro-level transactional interpretations of due diligence, governance and valuation and macro-level political-economic explanations of coalition management, brinksmanship and war mongering rhetoric.

(4) Isomorphism, Functor, Adjunction and Natural Transformations. The abstract and austere language of diagrams helps us see the essential structures of what must be. These Category Theory constructs are simply accounting methods for precisely tracing and tracking our thought processes. This intensionality view of science is not everyone's cup of tea. Unlike a full-blown extensionalist view which normally finds itself shipwrecked on pretending to feast on absolute infinities, Intensionalists don't make these kinds of superficial ontological if not childish errors. But the insights of the Intensionalists remain curiously childlike due to the depth of their questions which are pointedly faithful to their original motivation and philosophical manifesto which was to discover the truth of physical reality. The new financial theology carries on this veritable tradition.

5. The Need For Financial Theology. For a gutsy and determined intensionalist view, see Bouwer's "Life, Art and Mysticism," at: http://projecteuclid.org/DPubS/Repository/1.0/Disseminate?view=body&id=pdf_1&handle=euclid.ndjfl/1039886518. His words at p. 429 on the state of the world as general emotional suffering driven by insatiable greed and his solution to this problem of micro-to-macro misery via expansive and critical interiority could the basis of a financial theology.

Saturday 16 July 2011

Sudden Destruction August 7, 2007: Can it happen again in August 2011?

1. Finally, we have a NY Fed analysis of the freezing up of the ABCP Market on August 7, 2007. See: http://www.newyorkfed.org/research/conference/2009/cblt/ACHARYA_presentation_FRBNY.pdf

2. See especially slide 3 entitled "Money Market's "Canary in the Coal Mine"".

3. The authors to said presentation still don't understand the regulatory catalyst for the market's sudden departure, namely, rule 2(a)7 which defines the value of a money fund as its amortised cost over a 12 month period. Any Money Market fund that is 50 basis points out of its rule 2(a)7 value must report such to the SEC. Thus, any perceived risk to one MMF is a real risk to all MMFs. They withdrew their support for the ABCP Market altogether.

4. Could they do the same for other asset classes?

5. Absolutely. Any short term market infiltrated by MMF will carry the same sensitive simultaneity.

6. Look to see how the MMFs react to US debt ceiling debate. If one MMF withdraws support to the US Treasuries, then ALL will withdraw support.

7. In n-Category theory terms, MMFs may suddenly come into existence as a morphism from the domain of the normal to the codomain of the chaotic. In the coming weeks, knowing precisely how the MMFs are reacting to announcements made from the political theatre is the single most important factor in the financial trading world.

High Frequency Trading as An Operad

1. Check out Nanex's research on high frequency trading (HFT) "flash crashes", here:http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html

2. They argue that HFT makes a nonsense of the regulatory principle that exchanges should offer the best possible price--the National Best Bid and Offer price. Price discovery in the algo-electronics trades is simply simultaneous execution across many pools. It's more "price dictation" than any form of "discovery", more direct manipulation than any sort of market risk. See especially the HFT simulation embedded here: http://www.nanex.net/Research/IsNBBOIgnored.html

3. HFT is basically an operad, which means there is a multicategory (that is, a finite but higher dimensional input) with one result.

US Default Analysis: [B][B] ->[B][I]

1. From an n-Categorical analytical perspective, a US failure to raise the debt ceiling means that the US would move immediately from the Bailout->Bailout morphism to a near perfect Bailout ->Innovation morphism. This means that the invariance of default which mediates all decisions in the financial markets will have a chance to move from the 3rd to the 4th phase of the Great Cycles of Default.

2. Recall the Great Cycles of Default have the following permutations in a rotational symmetry:

(1) [I][I]
(2) [I][B]
(3) [B][B]
(4) [B][I]

Where:

[I] means the virtuous circulation of financial innovation where individuals are identified and accorded the full set of Hohfeldian idempotents.

[B] means government bailouts prevail and are ambient.

The binary operation or morphism between any two brackets is the Default Invariance.

For illustration purposes, the period 1986 to 2008 was mainly (1) where financial innovation prevailed through default since most defaults could in turn be mediated by bankruptcy.
From the 2008 period, we entered a period where the morphism of default is wedged between bailouts. With the morphism of default we have GSEs (Fannie Mae and Freddie Mac) that are in perpetual government sponsored limbo and globally dispersed catastrophic volatility where AAA sovereigns transform into international pariah status--e.g. PIIGS, then US States, and then, none other than the US Federal government.

However, since the US government debt represents the ultimate station ("the Golgotha") of default transmission in the [B][B] phase and if the US does default then that event would represent the beginning of the 4th period where the default invariance is a morphism from [B] to [I].

3. The Fed will need to prioritise its cash inflow of $170 Billion. It could pay the $29bn on interest payments and still have $140 bn.

"Geithner could pay: the interest on the debt, all Social Security obligations, all Medicare and Medicaid obligations, all Defense contractor bills, all Veterans payments, and all active duty troops; and still have almost $7 billion left over for other items." Quoted by http://washingtonexaminer.com/blogs/beltway-confidential/2011/07/morning-examiner-lack-default-risk-beginning-dawn-left#ixzz1RtLFmFN, which in turn came from The BipartisN Policy Center at http://www.bipartisanpolicy.org/sites/default/files/Debt%20Ceiling%20Analysis%20FINAL_0.pdf

RMBS Litigation: The Failures of Disclosure Regimes

FSA & DEXIA v DEUTSCHE BANK July 13, 2011
http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2011/07_-_July/dexiavdeutschebank.pdf

ALlstate v MORGAN STANLEY July 6, 2011
http://newsandinsight.thomsonreuters.com/uploadedFiles/New_York/News/2011/07_-_July/allstatevmorganstanley.pdf

1. The above complaints represent the proposition that a failure to disclose material information which may sway the mind of the potential investor is a violation of the US Securities Act 1933.

2. In both complaints, we have evidence that the issuers of the RMBS did not fully disclose their genuine opinions about the quality of the bonds they sold. In email communications to non-investors, the issuers disparaged and belittled the quality of that which they sold to investors. Given the overlapping time when these communications to third parties and lodgers to investors occurred, we are asked by plaintiffs' counsels to draw the inference that the issuers were perpetrating a fraud.

3. Lessons for Executive Behaviour

(a) Emails are discoverable and are evidence of the actual mental disposition of parties. In Hohfeldian terms, emails hold no immunity to the person who emails, nor does the emailer have privilege of privacy. In fact, the emailer has a negative liability under the Securities Acts and a duty to be honest.

(b) Holding Short Positions While Selling Longs. This is said to be the natural way a broker conducts its business. If so, then this may be reason enough to bring back the Glass-Steagall Act, in which deposit taking institutions are segregated from investment banks which buy and sell assets on a highly leveraged basis. Put another way, is it reasonable to expect an investment bank to make money if it is forced to disclose the information which gives its reason for survival?