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Tuesday, August 21, 2007

MMI: It's Getting Ugly Out There

by Tanta on 8/21/2007 07:32:00 AM

CNN, "Housing Woes Hit High End":

For years jumbo rates were only 0.25 of a percentage point above those of "conforming" loans -- those below the cutoff (now $417,000). In recent weeks that spread has exploded to 0.75 of a percentage point or more. reports that the average tariff on jumbo loans soared to 7.35% nationally in August, and many mortgage brokers are reporting figures that exceed 8%.
Tariff? It's like we have . . . two Americas or something . . .

FT, "Money Market Funds Abused, Claims Founder":
Most investors, Mr Bent says, are unaware that some of the largest money market funds are putting their cash into one of the riskiest debt investments in the world - collateralised debt obligations backed by subprime mortgage loans.

"That is clearly inappropriate," Mr Bent says. "It really reflects poorly on what we are here to do. The sanctity of the dollar is key."

He adds that cash management must be viewed as a separate business and requires a certain skill. "In the current market environment, lots of money fund portfolio managers are acting as credit analysts when they are not. In fact, they wouldn't know if the underlying credit risk bit them on the behind."
Actually, I think they wouldn't recognize credit risk if it inappropriately jazzed their returns for several lucky years. Now that it's got its teeth firmly embedded in their gluteus maximus, they seem to be catching on.

WaPo, "For Wall Street's Math Brains, Miscalculations":
Short for "quantitative equity," a quant fund is a hedge fund that relies on complex and sophisticated mathematical algorithms to search for anomalies and non-obvious patterns in the markets. These glitches, often too small for the human eye, can present opportunities for short- and long-term trades that yield high-profit returns.

The models replace instinct. They try to turn historical trends into predictive science, using elegant mathematics seemingly above the comprehension of your average 401(k) participant or Wall Street fund manager.

Instead of veteran, market-savvy traders waving fistfuls of sell slips, the elite quant funds employ Nobel nerds with math PhDs, often divorced from the real world. It's not for nothing that they are called "black-box" funds -- opaque to outsiders, the boxes contain investment magic understood by only the wizards who conjured it up.

In any period of market correction--let alone a full-blown crisis--you can always, always count on the mainstream press to trot out anti-intellectual drivel like this. I don't want to do a reductio in the other direction, but you know, a lot of our current problems were caused by lenders who didn't read the numbers off a paystub, or couldn't measure the riskiness of 50% of pretax income being devoted to debt service. For some reason, when we have an elephant in the room, we want to go after those "too small for the naked eye" quant nerds first. Why is that?